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THE   BUSINESS   OF   FINANCE 


BY  THE  SAME  AUTHOR. 


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LONDON  :  JOHN  MURRAY. 


THE 

BUSINESS  OF  FINANCE 


91/ 


<L^ 


BY    HARTLEY   WITHERS 


For  hath  not  nature  furnisht  man  with  wit  and  valour,  and  as 
it  were  with  armour,  which  may  bee  used  as  well  unto  extreame 
cvill  as  good? — Richard  Hooker,  Ecclesiastical  Politie. 


LONDON 

JOHN   MURRAY,   ALBEMARLE   STREET,   W. 

1918 


PRINTED    BY 

WILLIAM   CLOWBS  AND   SONtf,    LIMITED 

LONDON   AND   BECCLES,   ENGLAND 


All  righu  reserved 


CONTENTS 

CHAPTER  I 

INTRODUCTORY 

►AGE 

Progress  about  to  begin — The  Effort  needed — The  Position 
of  Finance — The  Problem  to  be  dealt  with — The 
Work  of  Finance — The  Objects  and  Ideals  to  be 
aimed  at i 

CHAPTER   U 

THE  PROVISION   OF  CURRENCY 

Currency  and  Money — Precious  Metals — Bills  of  Ex- 
change— Bank  Notes — Government  Notes — Cheques 
V  — The  manufacture  of  the  Cheque  Currency — The 
*  "Quantity  Theory" — Responsibility  of  Bankers  for 
\  Inflation — The  Regulation  of  Currency  Issue— Sug- 
i  gestcd  Demonetization  of  Gold 23 

CHAPTER   HI 

CREDIT 

How  provided — A  Bank  Balance  Sheet — Loans  and  Ad- 
vances—Bills of  Exchange — Acceptance — Loans  to 
Stockbrokers — Investments  by  Banks — Credit  and 
Production — Regulation  of  Demand — The  Bankers' 
Responsibility      ,        .        « 63 


!< 


«>  < 


'0«)2() 


vi  CONTENTS 

CHAPTER   IV 

CAPITAL 

PAGE 

Distinguished  from  Credit — How  Produced — Finance  and 
Capital — The  Public's  Delusions — Attacks  on  Capital 
— Embittered  by  bad  War  Finance — Capital's  Justifi- 
cation— Its  past  Misdeeds — Collective  control  of 
Capital — Working  Men  Capitalists     ....      80 


CHAPTER   V 

COMPANY  capital] 

The  Public  and  its  Investments — The  Obscurities  of  a 
Balance  Sheet — The  Education  of  the  Public — Re- 
sponsibility of  Finance        ......     107 


CHAPTER  VI 

THE  manufacture  AND   MARKETING  OF    • 
SECURITIES 

Prospectuses — Freedom  and  its  Drawbacks — The  Forms 
of  Securities — The  Market — The  Issue  of  Securities 
— Government  Control — Is  Speculation  Wicked?      .     133 


CHAPTER   VII 

INTERNATIONAL  CURRENCY 

Bills  of  Exchange — Based  on  Goods  and  Services  ex- 
ported— Visible  and  Invisible  Exports — Rates  of 
Exchange — Finance  Bills — Gold  Movements — The 
Gold  Exchange  Standard— rlntemational  Bank  Notes     155 


CONTENTS  vii 

CHAPTER  VIII 

INVESTMENT  ABROAD 

PAGE 

Obstacles  after  the  War — Its  Effects — How  affected  by 
IManner  in  which  Present  War  ends — Its  past  Record 
—  Its  Power  for  Good  and  Evil— Difficulties  of  Safe- 
guarding— The  Unpopularity  of  the  Creditor  Country     iSo 

CHAPTER   IX 

FINANCE  AND  GOVERNMENT 

Questions  of  Taxation — Direct  v.  Indirect — Fiscal  Ideals 

— Inflation  and  Borrowing — Conclusion     .        .         .     206 

INDEX 235 


THE    BUSINESS  OF   FINANCE 
CHAPTER  I 

INTRODUCTORY 

Mankind  is  now  suffering  from  a  raging  fever, 
due  to  an  ill-ordered  life  and  an  overheating 
diet.     It  knows  that  it  is  going  to  get  well 
again  some  day,  and  in  the  lucid  intervals  of 
its  malady  it  is  making  up  its  mind  that  this 
sort  of  thing  is  never  going  to  happen  again. 
The  bad  or  stupid  rulers  who  have  brought  it 
to  such  a  pass  are  going  to  be  requested  to 
retire  (this  process  has  begun  in   Russia,  but 
much    more    has    to    be    done   and    in    many 
countries)  ;  the  world  is  going  to  be  governed 
niore  sensibly,  and  with  a  clearer  view  of  the 
appalling    disasters    to    which    man    is    liable 
owing  to  the  devilish  success  with  which   he 
has!  perfected  the  means  of  destruction,  unless 
his  tendency  to  mutual  destruction  is  exorcized 
and  chastened  into  brotherly  goodwill.     More- 
over, the  revelation  of  man's  power,  which  his 


2  INTRODUCTORY 

ingenuity  in  destruction  has  given  us,  is  going 
to  be  made  use  of,  when  once  this  fitful  fever 
is   overpast,   for   productive   and   constructive 
achievements   such   as   have   never  yet  been 
imagined.     Better  still,  man  is  not  only  going 
to  be  better  governed  by  his  rulers  and  leaders : 
he  is  going  to  learn  to  govern  himself  better. 
For  the  war  is  showing  us  that  the  real  strength 
of  a  nation  is  the   strength   and   health   and 
intelligence  and  sense  of  national  duty  of  its 
individual  citizens.     It  has  brought  home  to 
the  members  of  the  nations  engaged  in  it,  as 
nothing  ever  did  before,  that  every  man  and 
woman  counts,  and  that  it  is  the  duty  of  each 
one  to  be  as  well  fitted  as  possible  in  mind  and 
body  to  play  a  part  well  in  life's  drama.     The 
big  fellows  mouth  and  strut  before  the  foot- 
lights, but  it  is  the  crowd  at  the  back  of  the 
stage,  with  no  ** speaking  part,"  that  produces 
the  real  effect.     In  short,  war  has  shown  us 
how  tremendous  is  man's  power  over  nature, 
how    prodigiously    he    has    wasted    it,    what 
miracles  he  can  accomplish  if  he  makes  good 
use  of  it,  and  finally  that  he  cannot  attempt 
to  do  so  until  he  has  improved  his  power  over 
himself  and  learnt  to  keep  himself  in  order. 

These  lessons  learnt,  there  will  be  a  great 
stride  forward  in  moral  and  material  progress. 
Progress,  in  fact,  may  be  said  to  be  just  about 


THE   EFFORT   NEEDED  3 

to  begin,  when  the  present  malady  and  the 
subsequent  disorders  of  convalescence — which 
may  be  severe  and  long  lived — have  been 
overcome.  Perhaps  it  may  be  said  that  the 
beginning  has  already  been  made,  and  that 
it  dates  from  the  day  on  which  the  United 
States,  by  intervening  on  the  side  of  Liberty, 
recognized  that  Progress  cannot  be  confined 
to  one  nation,  but  must  be  world-wide  if  it  is  to 
go  forward  to  its  full  triumph.  This  glorious 
vista  of  possible  achievement  that  we  can  see 
dimly  through  the  murk  of  war  will  only  be 
reached  by  a  great  effort  on  the  part  of  every 
nation  and  of  every  citizen.  Progress  does 
not  happen  of  its  own  accord.  It  has  to  be 
worked  for,  or  fought  for,  every  day  by  every 
one  who  wants  to  win  it.  Chasing  rainbows 
over  the  mountain  tops  is  glorious  fun  for 
those  who  like  it,  and  is,  indeed,  essential  to 
progress,  but  it  is  hard  work  on  the  practical 
details  of  Hfe  that  takes  things  forward  ;  and 
in  the  great  effort  that  has  to  be  made  every 
worker  has  to  consider  how  what  he  is  doing 
fits  in  with  the  great  enterprise  of  bettering 
man's  lot,  whether  his  work  is  furthering  it  or 
hindering  it ;  if  it  is  furthering,  how  it  can  be 
improved ;  if  it  is  hindering,  how  it  can  be 
reformed  most  thoroughly  or  buried  most 
decently.     Every  form  of  man's  activity  has 


4  INTRODUCTORY 

to  be  overhauled  and  bettered,  and  those  that 
cannot  justify  themselves  are  likely  to  get 
short  shrift.  Kings  and  Parliaments,  Churches 
and  schools,  philosophies  and  sciences,  em- 
ployers and  employed,  producers,  middlemen, 
officials,  consumers,  writers  and  talkers,  all  are 
being  tested  by  the  stress  of  war  before  the 
judgment  of  an  exceedingly  critical  public, 
that,  sick  and  sore  with  the  sufferings  that  this 
cataclysm  has  brought  upon  it,  cannot  see  why 
these  horrors  should  have  happened,  and  only 
submits  to  them  in  the  hope  that  they  will 
never  happen  again. 

In  the  general  refurbishing  that  is  one  of  a 
few  things  that  one  can  expect  with  confidence, 
Finance  will  come  in  for  its  full  share  of 
question  and  criticism.  Like  all  other  institu- 
tions it  will  have  to  justify  itself.  It  is  looked 
on  with  suspicion,  in  the  first  place,  because 
its  mysteries  are  "caviare  to  the  general,"  as 
Hamlet  says,  and  being  little  understood  it 
is  easily  misunderstood ;  but  also  and  chiefly 
because  people  are  known  to  make  a  great 
deal  of  money  out  of  it,  and  one  of  the  things 
about  which  public  opinion  is  now  strongly, 
and  justly,  convinced,  is  a  belief  that  the  dis- 
tribution of  wealth  may  and  must  be  improved, 
and  that  superfluity  and  glut  at  the  top  of 
the   ladder,   with   destitution   and    despair   at 


A  WIDER   VIEW  5 

the  bottom,  are  conditions  incompatible  with 
true  civilization.  Finance  has  to  justify  itself 
as  a  beneficent  and  indispensable  institution, 
showing  that  it  earns  its  wages  and  does  good 
work  for  the  furtherance  of  economic  progress, 
work  that  could  not  be  done  otherwise,  or  more 
efficiently,  as  society  is  at  present  constituted. 
At  the  same  time,  Finance  has  to  consider  the 
joints  in  its  harness  and  take  earnest  counsel 
with  itself  concerning  improvements  in  its 
machinery.  That  it  will  do  these  things  I 
have  no  doubt.  But  every  one  who  works  in 
its  great  world-wide  factory  will  have  to  lend 
a  hand,  taking  a  wider  view  than  hitherto 
of  his  responsibilities.  Bankers,  financiers, 
stockbrokers,  bill  discounters,  have  to  re- 
member that  earning  a  profit  for  themselves 
or  for  stockholders  is  not  the  beginning  and 
end  of  their  business,  but  that  they  are  in 
charge  of  a  big  wheel  in  the  great  machinery 
of  production  and  distribution  of  wealth,  and 
so  helping  the  progress  of  mankind  to  a  better 
state  of  mind  and  body.  Finance  Ministers 
and  tax-gatherers  have  to  remember  that 
balancing  this  year's  Budget,  and  getting 
revenue  in  with  least  possible  soreness  on 
the  part  of  the  tax-payers,  and  especially  of 
their  own  political  supporters,  is  less  important 
than  the  question  whether  their  measures  and 


6  INTRODUCTORY 

methods  are  tending  to  increase  or  hinder  the 
growth  of  their  country's  wealth,  and  the  world's 
output  of  goods. 

This  great  conflagration,  which  has  thrown 
a  fierce  light  on  so  many  things,  has  illumined 
with  its  glare  many  facts  about  finance  which 
have  hitherto  been  only  dimly  recognized.  It 
has  put  Finance  in  its  right  place,  and  that  place 
is  less  important  than  many  people  thought.  It 
is  not  the  great  ruling  power  that  it  was  believed 
to  be,  but  is  merely  the  humble  handmaid  of 
Industry.  Finance  makes  and  handles  claims 
to  wealth  and  thereby  assists  in  its  production. 
But  the  wealth — the  goods  and  stuff  that  man 
produces,  and  the  services  that  he  renders  to 
his  fellows — is  the  really  important  thing  in 
the  world's  economic  problem.  Without  the 
workers  who  make  the  stuff  and  render  the 
services.  Finance  cannot,  by  the  most  ingenious 
jugglery,  add  one  cubit  to  its  stature.  It  is 
equally  true  that,  as  things  are.  Industry  could 
not  do  a  day's  work  without  Finance.  But 
while  Industry  is  essential  to  life,  Finance  is  a 
piece  of  machinery  which  can  be  replaced  if 
mankind  decides  that  it  might  be  improved  on. 
We  all  remember  how  many  people  thought 
that  a  great  war  in  Europe  could  hardly  last 
many  months,  because  it  would  cost  so  much 
that   it  would   not   be  possible  to  "find  th^ 


THE   PRINTING   PRESS  7 

money."  Experience  has  shown  that  as  long 
as  the  stuff  necessary  for  war  can  be  turned 
out,  the  problem  of  finding  money  (of  a  sort) 
is  easy,  because  Governments  with  or  without 
the  help  of  the  banking  machinery  can  manu- 
facture money  as  fast  as  it  is  needed  and 
induce  their  peoples  to  pass  it  current  to  an 
apparently  almost  unlimited  extent.  In  fact, 
as  will  be  shown  later,  one  of  the  results  of  the 
war  has  been  a  vast  increase  in  the  output  of 
money,  and  a  consequent  rise  in  prices,  because 
the  output  of  goods  did  not  keep  pace  with  it, 
and  one  of  the  problems  that  Finance  will  have 
to  face  very  seriously  is  the  effect  of  this  dis- 
covery on  the  minds  of  the  unreflecting  public, 
which  is  apt  to  think  that  multiplying  money 
makes  it  richer,  and  to  welcome  schemes  for 
enriching  it  by  the  simple  industry  of  the 
printing  press. 

But  if  Finance  is  only  the  servant  of  In- 
dustry, this  is  a  position  that  puts  its  services 
in  the  very  front  rank  for  importance  in  the 
great  move  forward  that  is  coming.  If  man- 
kind is  to  be  made  better  and  the  world  a 
better  place  to  live  in,  one  of  the  first  things  to 
be  done  is  to  make  mankind  better  off.  This 
achievement  will  not  by  any  means  solve  the 
chief  problem,  because  if  though  generally 
better  off  we  continue  to  take  sordid   views 


8  INTRODUCTORY 

about  wealth  as  an  end  in  itself  and  about  the 
means  by  which  it  is  fair  to  arrive  at  it,  then 
nobody  will  be  at  heart  more  comfortable,  and 
the  economic  relation  of  man  with  man  will 
continue  to  be  a  bar  to  contentment  and  the 
attainment  of  the  good  life.  But  a  great  in- 
crease in  material  goods  will  be,  at  least,  a 
help  towards  the  creation  of  a  better  world. 
To  the  lofty  philosophic  soul  the  possession, 
or  lack,  of  earthly  goods  is  an  irrelevant  detail 
that  has  no  effect  on  conduct.  But  most  of  us 
ordinary  folk  find  it  easier  to  be  honest  and 
kindly  and  contented  if  we  are  assured  of  a 
fair  day's  wage  for  a  fair  day's  work,  and  are  not 
compelled  to  live  in  chronic  anxiety  concern- 
ing the  provision  of  our  daily  bread.  When 
the  burglar  has  burgled  enough  to  secure  a 
competence  he  is  apt  to  settle  down  into  a 
most  respectable  and  exemplary  citizen.  What 
we  have  to  do  is  to  make  an  honest  living  so 
easy  to  earn  that  man's  higher  faculties  may 
have  a  better  chance  of  being  developed.  As 
long  as  most  of  the  inhabitants  of  the  world 
live  in  a  state  of  sordid  insecurity  there  is  little 
chance  of  getting  the  best  out  of  them. 

On  the  economic  side  of  things,  then,  the 
problem  that  is  before  us  is  just  the  old  problem, 
illuminated  and  simplified  by  the  great  dis- 
coveries that  have  been  made  in  the  course  of 


WAR'S   LESSON]  9 

the  war.  That  old  problem  is  the  improve- 
ment of  the  output,  transport,  and  distribution 
of  goods.  War  has  taught  all  the  warring 
countries  that  they  had  a  great  store  of  energy 
available  for  production  that  had  hitherto  gone 
to  waste  ;  and  that  on  the  other  hand,  many  of 
the  goods  and  services  that  used  to  be  con- 
sidered as  essential  to  the  full  enjoyment  of 
life  could  be  foregone  without  any  real  sense 
of  sacrifice — often,  as  in  the  case  of  heavy 
dinner-parties  and  other  forms  of  fashionable 
entertainment,  with  a  very  real  sense  of  relief. 
If  it  had  not  been  for  the  ever-present  thought 
of  the  awful  loss  of  life  among  the  flower  of 
the  world's  manhood,  many  people  would  have 
found  life,  under  warfare's  austere  conditions, 
a  pleasanter  business  than  the  old  Vanity  Fair 
round.  At  least  this  was  so  during  the  first 
two  or  three  years  of  war,  before  the  long 
strain  of  too  much  work,  too  much  official 
muddling,  and  too  much  waiting  for  good  news 
had  begun  to  tell  on  people's  nerves.  These 
considerations  may  surely  have  a  great  effect 
both  on  production  and  consumption.  If  their 
effect  lives,  it  will  mean  that  much  more  goods 
will  be  turned  out,  and  that  production  will  be 
more  concentrated  on  things  that  are  really 
wanted.  There  will  be  fewer  gamekeepers  and 
more  food  growers,  fewer  llunkeys  and  more 


10  INTRODUCTORY 

workers.  In  the  matter  of  transport  great 
economies  and  improvements  have  been 
effected  in  railway  management,  and  the  sub- 
marine has  taught  shipowners  and  shipmasters, 
and  all  who  handle  traffic  at  ports,  lessons  in 
efficiency  that  will  be  of  lasting  value.  The 
distribution  question — the  division  of  the  pro- 
duct— is  one  that  bristles  with  difficulties, 
which  are  likely  to  be  great  and  serious  when 
the  war  is  over,  and  may,  if  not  reasonably 
handled  by  all  parties  concerned,  produce  so 
much  friction,  and  worse,  that  all  the  great 
opportunities  for  the  improvement  of  man's 
lot  that  are  now  clearly  visible  may  be  lost,  or 
made  useless  for  generations.  But  at  least  the 
war  has  shown  that  only  by  harmonious  and 
well-organized  work  can  the  general  output  be 
increased,  that  that  general  output  is  the 
source,  and  the  only  source,  from  which  all 
incomes  are  derived,  that  high  wages  and  high 
profits  can  go  together,  and  that  ill-paid 
workers,  working  long  hours  under  unwhole- 
some conditions,  are  not  efficient  producers. 
That  Labour  will  claim  and  get  the  better 
share  of  the  good  things  of  the  earth  to  which 
it  has  long  been  entitled  is,  I  think  and  hope, 
certain  ;  and  that  this  achievement  will  tend  to 
healthier  industry  and  a  steadier  demand  for 
staple  goods  and  more  wholesome  conditions 


THE  WAR'S   END  ii 

in  the  whole  body  politic  is  an  equally  certain 
consequence,  if  Labour  uses  its  victory  wisely. 
Concentration  on  the  problem  of  an  increase 
in  the  general  welfare,  combined  with  a  clearer 
perception  of  the  fact  that  a  great  increase  in 
the  world's  output  of  goods  is  the  road  to 
general  comfort  and  content,  may  have  effects 
that  will  astonish  humanity. 

This  picture  of  a  great  development  of 
economic  activity  and  prosperity  after  the  war 
assumes,  of  course,  that  the  end  of  the  war  will 
be  such  that  peace  on  earth  and  goodwill  be- 
tween men  will  be  assured,  if  not  for  all  time, 
as  some  earnest  thinkers  and  workers  are  try- 
ing to  secure,  at  least  for  some  time  to  come. 
If  the  war  ends  with  a  peace  based  on  hatred 
and  vindictiveness  and  a  desire  to  renew  the 
struggle  as  soon  as  the  fighters  have  recovered 
from  exhaustion,  then  the  best  energy  of  man 
will  be  devoted  not  to  bettering  his  lot,  but 
to  training  the  world's  youth  to  the  arts  of 
destruction  and  to  perfecting,  by  means  of 
scientific  devices,  the  horrible  engines  of  war- 
fare that  have  made  the  present  struggle  so 
appalling  and  so  disgusting.  In  other  words, 
man  will  devote  his  best  energies  to  the  art  of 
destroying  himself  and  all  traces  of  such  civili- 
zation as  the  ages  have  produced.  The  pros- 
pect is  so  terrible  and  at  the  same  time    so 


12  INTRODUCTORY 

ridiculous  that  it  would  seem  that  both  fear 
and  a  sense  of  humour  should  save  him  from 
such  a  fate.  If  not,  then  the  great  increase  in 
output  will  take  a  different  form,  and  will  be 
devoted  to  a  multiplication  of  the  means  of 
destruction. 

In  any  case,  it  seems  clear  that  man,  with 
his  faculties  sharpened  and  his  perceptions 
quickened  by  a  struggle  that  has  made  nearly 
all  members  of  the  warring  nations  do  more 
and  think  more,  is  going  to  be  very  busy,  and 
will  need  in  an  increasing  degree  the  help  of 
the  machinery  of  Finance,  possibly  modified  to 
meet  new  circumstances  that  cannot  at  present 
be  foreseen.  The  chief  activities  of  Finance 
are  the  manufacture  and  provision  of  currency 
and  credit,  the  handling  and  distribution  of 
the  capital  that  is  saved  by  the  community  and 
put  into  the  equipment  of  industry,  and  the 
collection  and  spending  of  the  revenue  of  the 
nations,  and  the  raising  of  debts  for  any  pur- 
poses that  they  choose  to  pay  for  by  this  means. 
The  work  of  Finance  is  thus  divided  between 
private  enterprise  and  public  control.  The 
provision  of  currency  is  done  by  both  agencies, 
the  Governments  minting  the  coins,  while 
notes  are  printed  by  the  State  or  semi-State 
banks  (rarely  by  Governments),  or  by  joint- 
stock  banks  under  more  or  less  public  control 


PUBLIC  AND  PRIVATE  CONTROL  13 

and  patronage  ;  and  joint-stock  banks  provide, 
as  a  general  rule,  the  cheques  which  are  the 
most  commonly  used  forms  of  currency  in  the 
United  States  and  Great  Britain,  the  two 
countries  with  the  most  completely  developed 
financial  ororanization.  The  handlingf  of 
capital,  except  when  it  is  used  by  Govern- 
ments for  public  objects,  is  left  chiefly  in  the 
hands  of  private  enterprise,  and  is  managed 
by  bankers,  loan  issuers,  company  promoters, 
bond-sellers,  and  stockbrokers.  The  raising 
of  revenue  is  a  matter  for  which  the  Govern- 
ment is,  in  appearance,  solely  responsible ;  but 
its  policy,  especially  in  democratically  governed 
States,  is  largely  guided  by  public  opinion. 
International  payments  and  the  machinery  of 
exchange  have  hitherto  been  largely,  almost 
entirely,  in  the  hands  of  private  enterprise,  but 
war  has  made  many  Governments  take  a  new 
and  keen  interest  in  questions  of  exchange. 

It  is  possible  that  in  the  future  the  spheres 
of  influence  of  public  control  and  private  enter- 
prise will  be  varied,  and  that  the  encroach- 
ment of  the  former  on  the  boundaries  of  the 
latter  that  have  taken  place  during  the  war 
may  be  preserved  for  some  time  after  it,  if  not 
for  all  time.  If  so  it  will  be  at  first  sight  a 
somewhat  disastrous  result  of  a  war  waged  on 
behalf  of  liberty,  that  thereby  the  freedom  and 


14  INTRODUCTORY 

elasticity  of  private  enterprise  should  be  cur- 
tailed, and  its  activities  taken  over  by  the 
cumbrous  and  slow-working  State  machinery. 
But  it  is  possible  that  this  may  be  only  a  super- 
ficial view,  and  that  if  the  State  can  do  certain 
things,  hitherto  done  by  private  enterprise, 
more  cheaply  and  efficiently,  the  cause  of 
freedom,  in  the  widest  sense  of  the  word,  may 
be  actually  furthered  by  the  development  of 
State  control.  On  these  matters  and  many 
others,  we  have  to  try  to  rid  ourselves  of  all 
prejudice.  It  is  certainly  true  that  a  man  con- 
trolled at  every  turn  by  the  State  can  never 
grow  into  the  fully  developed  being  that  can 
only  be  produced  by  freedom  and  personal 
responsibility.  One  who  has  never  sinned 
because  he  has  never  been  given  the  choice 
or  chance  of  sinning,  is  not  therefore  a  good 
man.  He  is  not  a  moral  agent,  but  a  machine. 
But  if  control  and  regulation  in  material  things 
such  as  Industry  and  Finance  have  the  effect 
of  supplying  our  material  needs  with  less 
labour,  and  so  leave  us  free  for  the  develop- 
ment of  our  higher  faculties,  we  may  have 
gained  a  higher  freedom  by  the  sacrifice  of  a 
lower  one. 

But  so  far  there  is  much  to  be  said,  at  least 
in  England,  for  the  view  that  Government  con- 
trol, though  necessitated  by  war,  has  disgusted 


DISCREDIT   OF   GOVERNMENT    15 

the  public  by  its  ineptitude.  One  of  the  re- 
ports lately  issued  on  the  question  of  Industrial 
Unrest  in  England  made  the  following  state- 
ment : — 

"There  is  no  doubt  that  one  cause  of  labour 
unrest  is  that  workmen  have  come  to  regard  the 
promises  and  pledges  of  Parliaments  and  Govern- 
ment Departments  with  suspicion  and  distrust." 

This  feeling  of  suspicion  and  distrust,  which 
is  by  no  means  confined  to  workmen,  has 
certainly  shaken  the  public's  belief  in  the  effi- 
ciency of  its  governing  machinery.  On  the 
other  hand,  very  great  achievements  have 
undoubtedly  been  wrought  by  this  same 
machinery,  such  as  the  marvellous  develop- 
ment of  England's  output  of  munitions  and 
the  creation  of  a  great  Army  on  a  continental 
scale  in  the  course  of  a  war  in  which  her  part, 
as  a  fighter  on  land,  had  been  expected  to  be 
only  a  subordinate  service  to  the  cause  that 
she  espoused.  It  is  not  yet  possible  to  tell 
whether  the  final  verdict  at  the  end  of  the  war 
will  confirm  or  reject  the  view  that  a  develop- 
ment of  Government  control  in  Industry  and 
Finance  is  desirable.  All  that  we  can  be  sure 
of  is  that,  however  man's  activities  are  regu- 
lated, Finance,  whether  in  private  or  public 
hands,    has   an    immensely   important  part  to 


i6  INTRODUCTORY 

play  in  a  period  of  growth  that  is  certain  to  be 
of  extraordinary  interest  and  may  be  one  of 
quite  undreamt  of  achievement. 

Finance  can  only  do  the  great  task  that 
lies  before  it,  if  it  not  only  keeps  its  own 
machinery  in  the  most  perfect  order,  with  a 
view  to  providing  Industry  with  facilities  on 
the  soundest  lines  and  at  the  lowest  possible 
price,  but  if  it  also  looks  far  beyond  this 
obvious  duty  and  always  watches  carefully  to 
see  that  the  effects  of  its  work  are  in  the  best 
interests  of  mankind.  The  whole  world  is 
going  to  make  a  great  effort  to  move  things 
forward,  and  every  worker  has  to  remember 
always  that  his  effort  has  to  help.  It  will  not 
be  enough  for  Finance  merely  to  make  a  profit 
for  itself  and  sell  credit  cheap  and  make  the 
handling  of  capital  quick  and  satisfactory.  It 
has  to  use  all  its  great  influence  to  secure  that 
the  credit  that  it  creates  and  the  capital  that  it 
handles  are  used  for  the  right  objects,  pro- 
moting the  general  prosperity.  Only  thus  can 
the  best  interest  of  Industry  be  secured,  and 
the  interest  of  Finance  is  directly  bound  up 
with  that  of  Industry.  Every  time  the  effort 
of  Industry  is  misdirected  Finance  probably 
suffers  a  loss  and  is  certainly  discredited  in 
the  public  eye.  Every  time  the  promotion  of 
Industry  is  accompanied  by  social   evil,   the 


TO  WHAT   END?  17 

ever- watchful  critics  of  Finance  have  a  fresh 
item  in  their  list  of  charges  against  it. 

And  there  is  an  even  wider  responsibility 
that  financiers,  like  everybody  else,  will  have  to 
consider  if  the  effort  of  the  twentieth  century 
is  to  have  anything  more  than  a  merely  material 
effect.  If  we  suppose  that  the  most  skilful  and 
efficient  use  is  made  of  the  revelation  that  has 
lately  been  given  of  man's  power  over  nature, 
and  that  the  supply  of  material  goods  is  in- 
creased and  distributed  on  a  scale  and  with  a 
justice  and  success  that  have  never  yet  been 
thought  of  as  possible,  what  then  ?  What  use 
is  going  to  be  made  of  this  mighty  improve- 
ment ?  On  the  answer  to  this  question  the 
fate  of  real  civilization  hangs.  It  is  not  enough 
that  we  should  all  be  better  fed,  clothed,  and 
housed,  if  we  make  use  of  the  greater  leisure 
that  more  efficient  production  secures  by  wal- 
lowing still  deeper  in  a  stream  of  more  freely 
supplied  vulgarity.  Old-fashioned  economists 
have  been  justly  criticized  because  they  seem 
to  have  thought  that  an  increase  in  wealth  was 
the  sole  object  to  be  secured,  and  imagined 
that  the  process  of  competition  would  secure 
that  this  wealth  would  be  equitably  shared  and 
well  used.  Experience  has  shown  that  this 
assumption  was  unsound  in  a  world  in  which 
one  of  the  parties  to  the  industrial  compact 


i8  INTRODUCTORY 

was  in  a  much  weaker  position  than  the  other, 
and  the  poverty  of  the  manual  workers  and 
their  lack  of  education  often  left  them  at  the 
mercy  of  employers,  who,  on  'the  other  hand, 
believed  that  they  were  acting  in  the  interests 
of  the  whole  community  by  securing  their 
labour  at  the  cheapest  possible  rate.  This 
error  has  now  been  left  behind,  and  it  is  re- 
cognized that  ill-paid  labour  and  consequent 
destitution  are  not  only  a  stain  on  the  civiliza- 
tion that  permits  them,  but  an  economic  evil 
that  costs  every  nation  dear  in  which  they  are 
found.  It  is  now  admitted  that  it  is  not 
enough  for  a  nation  to  be  rich  as  a  whole, 
which  it  can  only  be  by  producing  a  great 
mass  of  goods  and  services  ;  but  that  its  wealth 
should  be  well  distributed,  and  that  the  goods 
and  services  should  be  devoted,  as  far  as  pos- 
sible, to  increasing  the  welfare  of  the  whole 
community.  But  is  it  not  necessary  to  carry 
this  development  still  further,  and  to  recognize 
that  the  best  distributed  material  welfare  will 
not  produce  a  fine  race  unless  it  is  accom- 
panied by  a  growth  in  our  ideals  and  an  im- 
provement, which  is  needed  in  all  classes,  in 
our  outlook  on  mental  welfare  .■* 

When  we  consider  the  use  that  has  so  far 
been  made  of  the  great  discoveries  of  the  last 
century  we  see  that  there  is  very  great  danger 


A  "CITY  OF   PIGS"?  19 

even  in  the  better  future  that  is  now  seen  to 
be  possible  that  the  marvels  of  science  may 
be  wasted  on  the  purposes  of  vulgarity.  Im- 
proved transport  cheapened  food  and  so  man 
spent  more  on  fineries  and  futilities  that  were 
a  terrible  evidence  of  the  taste  of  the  pur- 
chasers. Cheap  paper  and  cheap  printing 
gave  us  a  Press  and  a  literature  which  did 
little  credit  to  our  discrimination ;  and  the 
marvels  of  photography  and  the  invention 
of  the  cinematograph  were  applied,  with  de- 
grading ingenuity  and  success,  to  the  purposes 
of  sickly  sentimentalism  and  blatant  vulgarity. 
Such  nauseating  exhibitions  only  showed  how 
little  mankind's  appreciation  of  what  is  good 
had  kept  pace  with  the  development  of  his 
mechanical  skill. 

If  the  world  is  now  to  be  made  better,  It 
will  be  a  great  help,  as  has  been  shown,  to 
begin  by  making  it  better  off.  But  if  in  making 
it  better  off  we  lose  sight,  for  a  moment,  of  the 
real  object  to  be  gained,  we  shall  have  built 
only  what  Plato  called  a  City  of  Pigs.  In 
working  for  material  ends  we  have  to  keep 
our  minds  ever  fixed  on  the  better  ideal,  of  a 
world  in  which  every  citizen  of  every  nation  is 
fully  supplied  with  all  material  needs,  and  is 
also  fully  developed  in  mind,  intelligence, 
and  character — kindly,   courteous,  clever,  and 


20  INTRODUCTORY 

unselfish,  and  with  that  full  appreciation  of  all 
sorts  of  beauty,  in  action,  thought  and  per- 
ception, in  which  real  civilization  consists. 
Hitherto  it  has  been  thought  possible  only  to 
give  these  attributes  of  mind  to  a  minority  of 
each  community,  the  greater  number  having 
been  left  without  real  education  and  without 
leisure  enough  for  full  intellectual  development. 
In  Athens,  for  example,  a  minority  of  beings 
whose  mental  powers  must  have  been  on  a 
higher  level  than  those  of  any  society  that  has 
existed  since,  was  enabled  by  the  slave  labour 
of  their  dependents  to  lead  a  life  of  culture  and 
refinement  that  has  never  since  been  paralleled. 
Now  it  is  clear  that  if  the  right  effort  is  made 
along  the  right  lines,  the  use  of  machinery  and 
improved  industrial  organization  puts  such  a 
life,  improved  by  all  that  man  has  since  learnt 
from  Rome's  practical  wisdom,  from  Christian 
teaching  and  from  the  works  of  great  artists, 
writers,  and  musicians,  within  the  reach  of  the 
greater  part  of  mankind.  Will  this  effort  be 
made  ?  If  one  were  to  judge  from  the  attitude 
of  the  average  Englishman,  especially  of  those 
classes  which  are  alleged  to  be  educated,  to- 
wards intellectual  matters,  there  would  seem 
to  be  little  chance  for  real  Progress.  But 
perhaps  a  new  spirit  may  arise  if  the  war 
brings  the  right  end,  in  the  shape  of  a  world 


THE    REAL    OBJECT  21 

made  safe  for  democracy,  and  an  all-embracing 
League  of  Nations,  competing  only  in  effort 
for  the  improvement  of  all.  We  may  seem 
to  have  wandered  far  from  the  business  and 
duties  of  Finance,  but  it  is  not  so.  No  one 
can  work  well  unless  he  feels  that  he  is  work- 
ing not  only  for  his  own  profit  but  for  a  big 
thing  to  be  secured  by  his  work.  If  those  who 
work  the  machinery  of  Finance  see  what  a 
mighty  big  thing  might  be  made  of  this 
world,  for  others  who  will  be  born  after  them, 
they  will  roll  up  their  sleeves  to  their  job  with 
a  very  different  spirit,  and  with  very  different 
results.  The  direction  that  human  develop- 
ment takes  depends  chiefly  on  what  the 
majority  of  hard-working  people,  in  charge 
of  important  tasks,  think  is  worth  aiming  at. 
Mitherto  the  object  of  our  industrial  leaders 
has  been  to  produce  a  Hood  of  cheap  stuff 
and  force  it  down  the  throat  of  an  uneducated 
public  by  blatant  advertising.  The  disgusting 
results  of  this  degrading  system  arc  plainly 
visible  in  the  sordid  ugliness  of  our  civilization 
which  has  defaced  a  world  tliat  is  prodigal  in 
natural  beauty.  Improved  public  taste  with 
an  improved  ideal  in  Industry  will,  by  slow 
degrees,  transform  the  whole  spirit  and  appear- 
ance of  things.  Working  both  for  Industry 
and  for  the  public,    Finance  can   play  a  great 

c 


22  INTRODUCTORY 

part  in  this  transformation.  Mankind  is  still 
but  a  flock  of  sheep,  and  in  this  matter  of  the 
use  that  it  makes  of  its  money,  those  with  little 
money  follow  with  pathetic  stupidity  the  line  left 
by  those  who  have  much.  For  obvious  reasons 
the  business  of  Finance  is  largely  in  the  hands 
of  men  of  wealth.  The  vulgarity  of  wealth 
has  far  less  excuse  and  far  more  poisonous 
results  than  that  of  the  poor,  and  there  are 
many  methods  besides  vulgarity  through  which 
wealth  is  habitually  misused.  If  all  who  handle 
it  and  use  it  would  recognize  what  might  be 
made  of  this  world  if  we  really  tried,  the  world 
would  in  a  few  generations  be  peopled  by  folk 
as  different  from  the  average  man  of  to-day  as 
he  is  from  his  Simian  ancestor.  It  is  certain 
that  mankind's  development  will  be,  in  the 
years  to  come,  rapid  beyond  all  precedent. 
Whether  it  will  go  upwards  or  downwards 
will  depend  on  what  is  aimed  at  by  those  who 
count, -among  whom  are  those  who  work  the 
machine  of  Finance. 


CHAPTER    II 

THE    PROVISION    OF    CURRENCY 

Finance  being  the  machinery  by  which  money 
matters  are  handled,  the  first  thing  to  be  con- 
sidered, when  we  come  to  practical  details  of 
its  business,  is  the  money  or  currency  that  it 
creates.  It  is  very  necessary  to  be  clear  in 
our  minds  about  the  meaning  of  the  terms 
used,  and  to  stick  to  this  meaning.  I  regard 
money  and  currency  as  identical,  and  to  signify 
any  article,  whether  made  of  metal  or  of  paper, 
that  is  commonly  accepted  in  payment  for 
goods  and  services  in  economically  civilized 
countries.  It  should  be  noted  that  this  use  of 
the  word  differs  from  that  of  some  economists 
who  restrict  the  word  "  money,"  some  of  them 
to  actual  coins,  and  some  to  legal  tender,  that  is 
those  articles,  whether  coin  or  notes,  which  the 
State  compels  sellers  and  creditors  to  take  in 
payment.  I  venture  on  this  heterodoxy  of  a 
wider  meaning  to  the  word  because  I  think 
it  is  more  in  accordance  with  the  usages  of 
ordinary   speech,    and    also    because    I    think 


24     THE  PROVISION  OF  CURRENCY 

there  is  the  still  more  important  reason  for  it, 
namely,  that  the  essence  of  money  is  its  power 
to  be  exchanged  into  goods  and  services,  and 
that  this  power  is  just  as  effectively  possessed 
by  a  cheque  on  a  good  bank,  signed  by  a  good 
drawer,  as  by  any  gold  coin  or  gold  certificate. 
It  should  also  be  noted   that,  in  the  jargon 
of  the  financial  world,  money  has  yet  another 
meaning,  namely  a  short  loan.     "  The  money 
market"  means  the  price  at  which  banks  will 
lend  to  good  customers,  and  the  price  of  money 
in   this  sense  is   the  rate  at  which   they  will 
make  such  advances.    Much  confusion  arises  in 
the  minds  of  the  uninstructed  from  these  various 
meanings  given  to  the  word.     It  is  very  diffi- 
cult to  write  about  money  without  using  it  in 
different  senses  on  different  pages,  or  even  on 
the   same  page,   but   I   hope  throughout  this 
book   to   confine    it   to   the   use   that   I   have 
mentioned — namely  anything  in  the  shape  of 
coins  or  paper  instruments  that  is  commonly 
taken  in  exchange  for  goods  and  services. 

Among  these  instruments  the  cheque, 
which  I  have  already  named  as  being  hereti- 
cally  included  by  me  in  the  term  "money," 
is  by  far  the  most  important  in  the  volume  of 
its  utility  and  in  its  safety  and  perfection  as  an 
instrument  of  payment.  It  owes  its  being  to 
the   ingenuity    of    the    financial    machine    as 


inco'nvenience  of  barter   25 

worked  by  private  enterprise  and  to  the  con- 
fidence of  the  business  community  in  the 
honest  and  sound  conduct  of  that  machine  so 
worked.  But  as  it  is  only  taken,  because  it 
carries  with  it  the  right  to  the  more  primitive 
forms  of  money,  it  is  better  to  consider  them 
first,  so  following  the  course  of  currency 
history. 

There  is  no  need  to  go  over  that  history 
in  detail.  Suffice  it  to  recall  that  mankind 
began  by  exchanging  goods  and  services 
against  goods  and  services,  and  that  much  in- 
convenience was  involved  by  only  being  able 
to  make  an  exchange  when  two  parties  met, 
each  of  whom  was  possessed  of  an  article  which 
the  other  one  wanted.  So  it  came  about  that, 
when  a  tailor  wanted  boots  but  could  not  find 
a  cobbler  who  wanted  clothes,  he  would,  if  he 
could,  take  payment  for  clothes  in  some  article 
which  the  cobbler  would  accept  in  exchange 
for  a  pair  of  boots.  This  process  led  to  the 
adoption  of  some  article  of  common  utility  (in 
the  economic  sense  of  the  word)  as  a  medium 
of  exchange.  Utility  in  the  economic  sense 
does  not  necessarily  imply  usefulness  in  the 
housekeeping,  workaday  meaning  of  the  word, 
but  only  capacity  for  giving  satisfaction.  It  is 
a  fact  that  sometimes  makes  cynics  chuckle, 
that    the    article    of   commonest  utility  in  this 


26     THE  PROVISION  OF  CURRENCY 

sense  proved  to  be  the  precious  metals  with 
their  straight,  simple  appeal  to  human  vanity, 
and  the  "  utility "  that  they  consequently  pos- 
sessed in  decorating  the  person  of  the  owner, 
winning  the  favours  of  the  fair  and  propitiating 
primitive  deities  through  the  adornment  of 
their  temples  and  of  their  priests. 

Perhaps  it  was  just  as  well  that  man  should 
have  insisted  on  prettiness  as  the  most  essential 
point  in  the  article  that  he  was  prepared  to 
take  in  the  certainty  of  being  able  to  pass  it 
on  when  he  wanted  other  goods  or  services. 
The  amount  of  labour  that  he  has  sunk 
throughout  the  ages  in  digging  for  the  precious 
metals  may  some  day  astonish  his  more  rational 
descendants,  but  it  would  have  been  even 
worse  if  some  really  useful  article  had  been 
devoted  to  the  purposes  of  a  medium  of  ex- 
change. Of  the  other  advantages  of  the 
precious  metals  for  this  purpose — their  ductility, 
durability,  and  so  forth — the  text-books  on  the 
subject  have  told  at  length.  What  we  are 
concerned  with  is  the  fact  that  any  one  who  had 
a  lump  of  gold  or  silver  could,  owing  to  the 
universal  readiness  to  accept  them,  rely  on 
being  able  to  turn  them  into  anything  that  he 
wanted  within  the  limit  of  their  buying  power ; 
and  that  this  attribute  clung  to  them  through- 
out the  ages  as  use  and  wont,  and  the  power 


GOLD   AND   PAPER  27 

of  convention  and  habit,  confirmed  it,  until  now 
a  heap  of  gold,  silver  having  taken  a  subsi- 
diary position,  is  the  essential  basis  of  the 
most  highly  civilized  banking  system,  and  the 
paper  money  that  is  most  favoured  is  that 
which  is  most  readily  and  most  certainly  turned 
into  gold  on  demand,  if  its  holder  so  desires. 

Gold  still  has  value  as  a  commodity  for 
ornamental  purposes  and  for  use  in  dentistry, 
etc.,  but  the  demand  for  it  for  use  as  currency 
and  as  part  of  the  basis  of  credit  currency  gives 
it  a  place  by  itself  among  commodities. 

Owing  to  the  inconvenience  involved  by 
having  to  weigh  and  test  the  metals  whenever 
a  purchase  was  made,  the  device  was  hit  on  of 
cutting  them  up  into  pieces  of  a  definite  weight 
and  fineness,  and  so  the  art  of  coinage  still 
further  facilitated  the  transactions  of  trade. 
It  gradually  became  part  of  the  business  of 
Government  to  provide  the  citizens  with 
stamped  currency,  the  stamp  being  at  once 
an  official  guarantee  of  genuineness  and  a 
protection  against  those  who  might  make  a 
living  by  scraping  coins  and  then  passing 
them  on.  But  in  the  meantime  private 
enterprise  was  already  busy  with  the  problem 
of  providing  commerce,  especially  commerce 
between  nations,  with  some  handier  system  of 
payment  than  the  passing  of  heavy  lumps  of 


28     THE  PROVISION  OF  CURRENCY 

metal,  coined  or  in  bars,  and  it  is  clear  from  a 
passage  in  a  letter  from  Cicero,*  that  some 
system  of  making  oversea  payments  by  some- 
thing like  the  modern  machinery  of  foreign 
exchange  had  been  developed  before  the 
Christian  era,  and  the  word  used,  permutari^ 
was  the  Latin  counterpart  of  the  modern 
phrase.  By  1470  the  use  of  bills  of  exchange 
was  common  enough  to  be  thundered  against 
as  a  form  of  usury  by  Richard  Porder,  in  a 
Whitsun  Monday  sermon  at  St.  Paul's. 
**  When,"  he  said,  "  money  is  delivered  by 
exchange  betwixt  place  and  place  as  from 
London  to  Hamborough  etc.  to  bee  payde 
two,  three  or  fower  monthes  after  the  deliverie 
thereof,  and  in  respect  of  that  time  contracted 
and  given  any  greater  or  more  price  upon  the 
pound  or  hundreth  pounds,  than  the  price  is 
at  sight  by  the  market,  and  more  than  the 
deliverer  would  have  taken  to  have  had  pay- 
ment with  all  possible  speeds  at  sight  (as  they 
call  it)  that  overplus  or  greater  price  taken  for 
ye  times  forbearance  is  usurie  forbidden,  and 
that  deliverer  is  an  usurer."  f 

It  is  not  quite  clear  that  the  preacher  quite 
understood  the  system  that  he  was  denouncing, 

*  Cic,  ad  Att,,  12,  24. 

t  Quoted  by  Ellis   Powell,    The  Evolutwi  of  the  Money 
Market^  P-  -5- 


BILLS   OF   EXCHANGE  29 

but  it  is  clear  enough  that  the  object  of  his 
invective  was  the  system  of  payment  for  goods 
between  London  and  Hamburg  by  means  of 
bills  of  exchange  payable  two,  three,  or  four 
months  after  sight,  a  higher  price  being  ex- 
acted in  consideration  of  the  time  allowed  to 
the  buyer  of  the  goods  before  he  had  to  meet 
the  bill.  And  so  it  is  evident  that  the  bill 
of  exchange,  of  which,  as  will  be  shown,  the 
cheque  is  a  variation,  was  a  much  earlier  means 
of  payment  than  the  bank  note.  It  is  an  instru- 
ment of  credit  rather  than  a  form  of  currency, 
in  the  sense  in  which  I  am  using  the  word,  and 
so  its  functions  fall  within  the  next  chapter,  but, 
as  it  had  to  be  mentioned  here  as  a  matter  of 
history,  it  is  better  to  clear  it  up  by  giving  its 
exact  legal  meaning — "  an  unconditional  order 
in  writing  addressed  by  one  person  to  another, 
signed  by  the  person  giving  it,  requiring  the 
person  to  whom  it  is  addressed  to  pay  on 
demand,  or  at  a  fixed  or  determinate  future 
time,  a  certain  sum  of  money  to,  or  to  the 
order  of,  a  specified  person  or  to  bearer." 

Since  very  large  commercial  transactions, 
especially  in  international  trade,  are  settled 
every  day  in  normal  times  by  means  of  bills  of 
exchange,  it  would  seem  at  first  sight  that  they 
ought  to  be  included  as  currency.  But  they 
do  not  pass  current  in  the  hands  of  the  general 


30     THE  PROVISION  OF  CURRENCY 

public.  They  arc  a  highly  specialized  means 
of  payment,  handled  chiefly  by  merchants  and 
financiers,  and  so  their  volume  does  not  directly 
affect  the  price  of  the  retail  goods  on  and  by 
which  the  average  human  being  lives.  Many 
people  spending  large  incomes  go  through 
their  lives  without  seeing  or  hearing  of  a  bill 
of  exchange. 

Some  centuries  after  the  invention  of  the 
bill  of  exchange  the  supply  of  credit  instru- 
ments was  increased  by  the  discovery  of  the 
bank  note,  which  is  still  a  form  of  currency  in 
the  sense  in  which  I  am  using  the  word.  It  is 
supposed  to  have  arisen  from  a  practice  which 
grew  up  by  which  people  left  their  coined 
currency  for  safe  custody  in  the  hands  of  the 
goldsmiths.  The  goldsmiths,  as  their  stock- 
in-trade  was  of  high  value,  naturally  would 
have  special  arrangements  for  its  safe  custody, 
and  consequently  their  customers  were  en- 
couraged to  leave  their  money  in  their  hands 
in  the  expectation  that  it  would  be  safer  from 
theft.  The  next  step  in  the  process  was  that 
people  who  had  deposited  coin  with  the  gold- 
smiths would,  when  they  had  to  make  a  pay- 
ment, instead  of  taking  the  coin  out  in  order  to 
make  it,  give  their  creditor  an  order  on  the 
goldsmith  for  the  amount  in  question.  These 
orders  on  the  goldsmiths  passed  from  hand  to 


A   PROMISE    TO    PAY  31 

hand  as  currency  and  so  fulfilled  the  purposes 
of  coin.  It  must  then  have  occurred  to  some 
unknown  but  epoch-making  goldsmith  that 
there  was  money  to  be  made  and  business  to 
be  done  by  supplying  to  customers  who  came 
to  them  to  borrow,  not  actual  coin,  but  an 
order  on  themselves  to  pay  coin.  The  gold- 
smith would  trust  that  these  orders  would  go 
into  circulation  and  be  out  some  time  before 
they  came  in  for  payment ;  and  from  this  to  the 
development  of  the  modern  note-issuing  banker 
is  a  very  short  step. 

The  bank  note  is  simply  a  promise  to  pay 
on  behalf  of  the  banker.  When  customers,  at 
the  note-issuing  stage  of  banking,  came  to  the 
bankers  for  monetary  accommodation,  they 
received  from  them,  not  coin,  but  a  promise  to 
pay  coin.  The  banker  lent  money  to  the  cus- 
tomer, and  the  customer  by  taking  the  banker's 
promise  to  pay  at  the  same  time  in  effect  lent 
money  to  the  banker,  and  so  this  curious 
system  of  currency  arose  based  on  mutual  in- 
debtedness between  two  parties.  As  long  as 
the  loan  was  outstanding  the  banker  received 
interest  from  his  client  for  the  advance  and  at 
the  same  time,  since  the  client  received  a  form 
of  currency  which  was  accepted  in  payment  by 
the  rest  of  the  community,  he  was  able  to  go 
into  the  market  for  commodities  and  provide 


32     THE  PROVISION  OF  CURRENCY 

himself  with  any  merchandise  that  he  wanted 
for  business  enterprise,  or  for  materials  for 
building  a  ship,  or  any  other  industrial  busi- 
ness that  he  had  on  hand. 

It  was  obvious  that  such  a  simple  means  of 
making  money  by  signing  promises  to  pay  was 
certain  to  lead  those  who  practised  it  into 
temptation  to  practise  it  too  freely,  and  the 
early  days  of  banking  are  a  melancholy  story 
of  the  ill  effects  of  the  over-issue  of  notes  by 
bankers  who  forgot  that,  in  order  to  keep 
themselves  and  their  customers  safe,  it  was 
necessary  to  have  a  stock  of  coin  always  in 
hand  to  meet  notes  that  might  be  presented. 
The  disasters  that  followed  from  the  conse- 
quent over-issue  of  notes  have  been  the  theme 
of  many  romances,  and  have  also  been  the 
cause  of  much  distress  and  disorder.  And  it 
is  well  known  to  everybody  that  the  issue 
of  notes  by  bankers  was  strictly  regulated  in 
England  by  Peel's  Act  of  1844.  Since  that 
date  the  Bank  of  England  note  has  been 
practically  a  bullion  certificate  with  a  strict 
line  drawn  by  the  law  for  the  amount  of  its 
fiduciary  circulation,  that  is  to  say  the  amount 
of  notes  the  Bank  of  England  is  empowered  to 
issue  with  Governmtnt  securites  as  backing. 
Over  and  above  that  line  every  ;C5  note  has 
to   have   £^   in  coin  or  gold   bars  behind   it. 


BANK    NOTES  33 

The  Bank  Act  did  permit  the  Bank  of  Eng- 
land to  hold  one-fifth  of  the  bullion  held 
against  its  notes  in  silver,  but  this  permission 
has  never  been  put  into  practical  effect,  though 
the  item  "Silver  Bullion,"  with  a  blank  against 
it,  is  still  to  be  seen  in  the  weekly  accounts 
issued  by  the  Bank  of  England's  Issue  Depart- 
ment. 

At  the  same  time  the  note  issues  of  the 
private  and  joint-stock  bankers  of  England 
were  strictly  regulated,  and  their  amount  is 
now  negligible  in  the  total  mass  of  the  British 
currency. 

Bank  of  England  notes  are  very  seldom 
seen  in  actual  circulation.  They  are  largely 
held  by  the  other  banks  as  a  reserve  against 
sudden  calls  upon  the  currency.  They  are 
used  occasionally  in  transactions  such  as  a 
transfer  of  real  property  in  which  legal  tender 
currency  is  demanded,  and  they  are  fairly 
frequently  to  be  seen  on  racecourses  when 
bookmakers  are  settling  with  their  clients. 

Notes,  or  [jromises  to  pay,  are  also  issued 
by  Governments,  chielly  by  those  of  economi- 
cally backward  countries,  but  in  America  the 
Civil  War  produced  the  greenback,  and  there 
are  also  gold  and  silver  certificates  issued 
against  the  deposit  of  these  metals.  In 
England    the    [)resent    war    has    produced   a 


34     THE  PROVISION  OF  CURRENCY 

Treasury  note  for  ;C^  ^nd  los.  This  happened 
at  the  beginning  of  the  war  when  a  severe 
banking  crisis  caused  the  public  to  hoard 
sovereigns,  and  the  banks  to  do  likewise.  The 
banks,  when  asked  for  money  by  their  de- 
positors, exercised  their  perfect  legal  right  of 
paying  them  in  Bank  of  England  notes,  and 
so  the  public  found  itself,  in  order  to  get  small 
change,  obliged  to  go  on  to  the  Bank  of 
England  and  cash  these  notes.  It  was  evident 
that  a  form  of  paper  currency  of  a  smaller 
denomination  than  ^5  was  required.  Why 
the  issue  was  made  by  the  Government  and 
not  by  the  Bank  of  England  we  shall  perhaps 
know  some  day  when  the  war  is  over.  At 
present  all  that  can  be  said  is  that  for  the 
Government  to  act  as  an  issuer  of  paper 
promises  to  pay  is  a  quite  new  departure  for 
England,  and  it  is  one  which  needs  very 
careful  watching,  as  it  is  already  producing 
a  crop  of  suggestions  that  anything  that  the 
Government  needs  it  can  easily  get  by  printing 
notes  in  payment  for  it.  It  is  understood  that 
these  Treasury  notes  are  not  actually  issued 
at  present  by  the  Government  in  payment  for 
goods  that  it  buys,  or  for  services  rendered  to 
it.  They  are,  in  fact,  handed  over  to  the 
banks,  which  pay  for  them  by  a  draft  on  their 
balance  at  the  Bank  of  England,  at  which  the 


govern:\ie:nt  notes        35 

chief  English  banks  all  keep  an  account. 
Nevertheless  the  final  result  is  exactly  the 
same  as  if  the  Government  were  to  pay  the 
notes  out  in  payment  for  purchases,  and,  as 
we  shall  see  later,  the  creation  of  currency  in 
this  manner  has  serious  drawbacks  attached 
to  it. 

Finally,  we  come  to  the  cheque,  which  is 
now  the  most  important  instrument  of  currency 
in  economically  civilized  countries. 

Cheques  were  already  in  common  use  at 
the  beginning  of  the  nineteenth  century,  and  it 
is  very  curious  that,  when  the  legislature  took 
meticulous  pains  to  regulate  the  note  issue 
of  Great  Britain,  it  should  not  have  observed 
that  it  was  devoting  all  this  trouble  to  reo-u- 
lating  a  form  of  currency  which  was  already 
threatened  by  the  appearance  of  a  much  more 
convenient  and  elastic  rival.  In  fact,  more 
than  ten  years  before  the  passing  of  Peel's 
Act  for  the  regulation  of  the  note  issue,  it 
had  been  discovered  by  far-seeing  people  in 
the  City  of  London  that  the  note  issue,  which 
had  hitherto  been  regarded  as  the  corner-stone 
of  the  banking  edifice,  was  a  comparatively 
unimportant  ornament  of  the  building.  This 
discovery  has  been  put  into  very  practical 
effect.  As  is  well  known,  the  Bank  of 
England  had  been  given  what  was  understood 


36    THE   PROVISION  OF  CURRENCY 

to  be  a  monopoly  of  joint-stock  banking  in 
London  by  the  provision  that  no  society  or 
partnership,  consisting  of  more  than  six  persons, 
should  be  empowered  to  issue  notes  in,  or 
within  sixty-five  miles  of  London.  It  was 
believed  that  by  this  enactment  banking  in 
London  would  be  reserved  for  the  Bank  of 
England  and  the  private  banks,  owned  by  a 
small  number  of  partners,  and  that  joint-stock 
banking  could  not  raise  its  head  in  the  presence 
of  this  monopoly.  But  when  it  was  seen  that 
a  note  issue  was  not  essential,  and  that  the 
cheque  book  was  a  much  more  useful  and 
satisfactory  machinery  of  banking,  this  mono- 
poly was  broken,  and  in  1834*  the  opening 
as  a  joint-stock  bank  of  the  London  and 
Westminster  Bank  initiated  a  movement  which 
has  covered  England  with  the  branches  of 
these  and  other  important  joint-stock  banks, 
having  a  head  office  in  London  and  so  enjoy- 
ing no  right  of  note  issue  but,  nevertheless, 
doing  a  banking  business  on  a  scale  which  has 
in  some  cases  dwarfed  the  figures  of  the  great 
central  bank  round  which  they  have  grown,  on 
which  they  lean  and  of  which  they  are  a  strong 
support. 

The  legal  definition  of  a  cheque  is  "  a  bill 
of  exchange,   drawn   on   a  bank   and  payable 

*  Ellis  Powell,  Evolution  of  the  Money  Market^  p.  304. 


f 


THE  CHEQUE'S  ADVANTAGES  37 

on  demand."  The  advantages  of  the  cheque 
are  many.  It  can  be  drawn  to  the  exact 
amount  required.  If  drawn  to  "Order"  it 
makes  the  endorsement  of  the  payee  neces- 
sary before  its  payment,  and  consequently  acts 
also  as  a  receipt  and  a  record  of  the  pay- 
ment. If  crossed  by  the  drawing  of  two  lines 
across  the  front  of  it,  it  can  only  be  collected 
through  the  bank  of  which  the  recipient  is  a 
customer ;  and  if  marked  '•  Not  negotiable,"  it 
throws  upon  the  bank  that  pays  it  the  onus  of 
seeing  that  the  title  of  the  party  to  whom  pay- 
ment is  made  is  good.  By  these  protections  it 
is  a  far  safer  instrument  to  use  than  a  Bank  of 
England  note,  since  any  thief  who  gets  hold  of 
the  latter  can  turn  it  into  goods  in  the  ordinary 
course  of  business,  so  that  the  necessity  for 
ensuring  the  safe  delivery  of  a  cheque  is  very 
much  less  than  in  the  case  of  a  bank  note. 

From  the  nature  of  the  case  it  was  impos- 
sible that  the  cheque  should  be  made  legal 
tender  currency,  that  is  to  say  that  any  one  to 
whom  a  debt  was  due  could  be  forced  by  law  to 
accept  a  cheque  in  payment.  Legal  tender  in 
England  is  confined  to  Bank  of  England  notes, 
Treasury  notes,  sovereigns  and  half-sovereigns 
up  to  any  amount,  silver  up  to  £2,  and  copper 
up  to  \s.  A  cheque  obviously  could  not  be 
made    legal    tender   because    that    would,    in 


38     THE  PROVISION  OF  CURRENCY 

effect,  have  amounted  to  a  guarantee  by  the 
Government  that  every  cheque  drawn  would 
be  good.  Any  one  who  accepts  a  cheque  in 
payment  does  so  with  the  risk  before  him  that 
the  man  who  has  drawn  the  cheque  may  not 
have  an  account  at  the  bank  at  all,  or  may 
have  overdrawn  it  if  he  has,  and  that  the 
cheque  may  be  returned  from  the  holder's 
bank  with  indications  marked  upon  it  that  it 
is  a  worthless  piece  of  paper.  There  is  also 
the  possibility,  happily  remote  in  these  times, 
that  by  the  time  the  cheque  is  presented  for 
collection  the  bank  upon  which  it  is  drawn 
may  have  failed.  It  is  for  these  reasons  that 
the  cheque  currency  has  been  often  left  out 
from  the  definition  of  money  put  forward  by 
economists.  Nevertheless,  it  seems  to  me 
right  to  include  it  since,  as  a  matter  of  actual 
practice,  the  great  volume  of  commercial  trans- 
actions is  day  by  day  settled  by  means  of 
cheques,  and  they  accordingly  fit  in  with  the 
wider  definition  of  money  that  has  been 
adopted  for  the  purposes  of  this  book. 

Such,  then,  are  the  forms  of  money  that 
are  now  used  by  economically  civilized  com- 
munities :  bank  notes.  Government  notes, 
cheques  and  coin. 

In  England,  before  the  war,  retail  trans- 
actions, although   even  they  were  to  a   great 


THE    POCKET    RESERVE         39 

extent  settled  by  cheque,  were  still  frequently 
paid  in  gold,  and  it  was  the  custom  of  the 
average  well-to-do  citizen  to  carry  several 
sovereigns  and  half-sovereigns  in  his  pocket  at 
all  times.  Since  the  war  the  place  of  these 
gold  coins  that  used  to  circulate  has  been 
taken  chiefly  by  Treasury  notes  and,  to  some 
extent,  by  a  larger  volume  of  silver  total 
currency  that  has  been  minted.  A  very  large 
number  of  sovereigns  used  also  to  be  held  in 
the  vaults  of  the  banks,  to  be  used  in  case 
of  a  sudden  demand  for  currency  by  their 
customers.  Whether,  when  the  war  is  over, 
we  shall  return  to  the  use  of  gold  in  circulation 
remains  to  be  seen.  It  was  often  argued,  in 
times  before  the  war,  that  it  was  an  extremely 
wasteful  form  of  currency,  and  that  it  would  be 
better  to  circulate  paper  with  a  gold  backing 
held  by  the  Bank  of  England.  The  contrary 
argument,  that  the  volume  of  gold  in  the 
pockets  of  the  people  was  a  reserve  that  would 
be  very  timely  and  useful  if  ever  war  or  crisis 
arose,  has  been  shown  to  be  very  true,  and 
many  monetary  experts  are  of  opinion  that  it 
is  very  desirable  that  this  pocket-money  reserve 
should  be  built  up  again  when  the  war  is  over. 
Of  these  various  forms  of  currency  it  will 
be  seen  that  one,  the  Treasury  note,  is  manu- 
factured directly  by  the  Government ;   that  the 


40     THE  PROVISION  OF  CURRENCY 

bank-note  is  manufactured  by  the  banker  under 
strict  Government  regulation  ;  that  gold  coins 
are  minted  and  stamped  by  the  Government  as 
the  gold  bars  are  brought  to  the  Bank  of 
England  and  to  the  Mint  to  be  coined;  and 
that  the  cheque  alone  is  manufactured  by  the 
bankers  without  any  limit  or  restriction  by  law 
or  Government  regulation.  By  this  interest- 
ing development  the  manu^cture  of  currency, 
which  for  centuries  has  been  in  the  hands  of 
Government,  has  now  passed,  in  regard  to  a 
very  important  part  of  it,  into  the  hands  of 
companies,  working  for  the  convenience  of 
their  customers  and  the  profits  of  their  share- 
holders. 

It  should  be  noted  that  in  America  this 
manufacture  of  currency  by  the  banks  is  subject 
to  Government  regulation,  since  the  Govern- 
ment imposes  a  legal  limit  upon  the  proportion 
of  cash  (that  is  to  say,  of  specie  and  legal 
tender)  to  the  deposits  which  the  banks  are 
liable  to  meet.  The  effect  of  this  strict  regu- 
lation has  in  the  past  been  very  far  from  happy, 
since  the  result  of  it  was  that  the  cash  reserves 
held  by  the  American  banks  were  useless  in 
time  of  crisis.  In  England  it  has  always  been 
a  maxim  among  bankers  that  the  way  to  meet 
a  run  upon  them  is  to  pay  out  their  cash  with 
the    utmost    appearance    of    willingness    and 


CURRENCY   MAKING  41 

readiness.  By  this  means  the  confidence  of 
the  public  is  restored,  and  a  run  has  over  and 
over  again  been  stopped.  But  if  the  banker 
is  forbidden  to  use  his  reserve  because  of  the 
legal  limit  imposed  by  the  Government,  he^is 
stopped  from  adopting  the  one  means  which 
experience  has  shown  to  be  most  efficacious  in 
time  of  trouble. 

It  may  perhaps  be  objected  that  the  state- 
ment that  the  banks  manufacture  the  cheque 
currency  is  incorrect,  seeing  that  it  is  not  the 
banks  but  their  customers  who  are  responsible 
for  the  creation  of  the  banking  deposits  which 
represent  the  right  to  draw  a  cheque.  But  it 
seems  to  me  that  there  is  in  this  respect  no 
essential  difference  between  the  bank-notes 
that  were  formerly  the  currency  of  the  com- 
mercial community  and  the  cheque  which  has 
now  taken  their  place.  Both  of  them  really 
are  created  by  the  action  of  the  banks  in 
making  advances  to  customers,  whether  those 
customers  be  ordinary  commercial  borrowers 
or  Governments  who  issue  securities,  e.g.  in 
time  of  war,  and  place  them  with  the  banks. 

In  old  times,  when  a  customer  went  to  a 
banker  for  a  loan,  the  banker,  if  he  agreed, 
handed  him  out  so  many  oP  his  own  notes  ; 
now  when  a  customer  goes  to  a  banker  for  a 
loan,  the  banker  gives  him  a  credit  in  his  books, 


42     THE  PROVISION  OF  CURRENCY 

i.e.  adds  to  the  deposits  on  the  liability  side  of 
the  balance  sheet.  It  is  true  that  the  customer 
does  not  leave  the  deposit  there  but  draws 
cheques  against  it,  which  he  pays  to  people  to 
whom  he  owes  money.  But  these  cheques,  if 
paid  to  recipients  who  also  bank  at  the  bank 
which  has  made  the  advance,  would  simply  be 
a  transfer  within  the  bank's  own  books,  and 
the  effect  of  the  transaction  upon  its  balance 
sheet  would  be  that  it  would  hold  among 
its  assets  an  increase — if  the  loan  was  for 
^100,000 — of  this  amount  among  its  advances 
to  customers ;  and  on  the  liability  side  there 
would  be  a  similar  increase  in  the  deposits. 
In  the  ordinary  course  of  affairs,  of  course,  it 
would  not  always  happen  that  the  parties  to 
whom  the  cheques  were  paid  would  also  bank 
with  the  same  bank.  They  would  pay  the 
cheques  into  their  own  banks,  whose  deposits 
would  be  increased,  and  if  we  could  look  at  an 
aggregate  balance  sheet  of  the  whole  of  the 
banks  of  the  country  we  should  see  that  any 
increase  in  loans  and  advances  would  have 
this  effect  of  increasing  the  deposits  as  long  as 
those  who  receive  these  banking  credits  make 
use  of  them  by  drawing  cheques  against  them. 
In  the  comparatively  rare  cases  where  the 
borrower  makes  use  of  the  credit  by  drawing 
out  coin  or  notes  from  the  bank,  then  the  first 


ADVANCES  AND  INVESTMENTS    43 

effect  would  be  that  the  bank  in  question 
would  hold  a  smaller  amount  of  cash  among 
its  assets  and  a  larger  amount  of  advances  to 
customers.  But  even  here  the  currency  with- 
drawn would  almost  certainly  come  round 
again,  either  to  this  bank  or  another,  from  the 
shopkeepers  or  other  people  to  whom  the 
borrower  had  made  payments.  And  so  the 
cash  resources  of  the  banks  as  a  whole  would 
be  restored  to  the  original  level,  while  the 
deposits,  owing  to  the  increase  at  the  credit  of 
the  shopkeepers  and  others  who  had  paid  the 
money  in,  would  be  added  to  by  the  amount  of 
the  advance  originally  made. 

Exactly  the  same  thing  happens  when,  for 
example,  in  time  of  war  the  banks  subscribe  to 
loans  issued  by  the  Government,  whether  in 
the  form  of  long-dated  loans,  such  as  the 
recent  War  Loan,  or  in  the  form  of  shorter 
securities,  such  as  Exchequer  Bonds,  Treasury 
Bills,  or  Ways  and  Means  Advances.  The 
bank  takes  a  security  from  the  Government 
and  pays  for  it  with  a  draft  on  its  balance  at 
the  Bank  of  England.  It  thus  holds  for  the 
time  being  a  smaller  amount  of  cash  at  the 
Bank  of  England  and  a  larger  amount  of 
Government  security.  But  as  the  Govern- 
ment draws  on  its  balance  at  the  Bank  of 
England,    the     cheques     which     it    pays    to 


44     THE  PROVISION  OF  CURRENCY 

contractors  and  other  people  to  whom  it  owes 
money  are  paid  in  by  them  to  their  banks,  and 
so  the  banks  have  their  cash  restored  to  them 
and  the  deposits  of  their  customers,  the  con- 
tractors and  others,  are  increased  by  the 
amount  of  the  securities  taken  by  the  banks. 

It  follows  that  the  common  belief  that  a 
great  increase  in  bank  deposits  means  that  the 
wealth  of  the  community  has  grown  rapidly, 
and  that  people  are  saving  more  money  and 
depositing  more  with  the  banks  is,  to  a  certain 
extent,  a  fallacy.  A  rise  in  bank  deposits,  as  a 
rule,  means  that  the  banks  are  making  large 
advances  to  their  customers  or  increasing  their 
holding  of  securities,  and  so  are  granting  a 
larger  amount  of  book-keeping  credit,  which 
appears  as  a  liability  to  the  public  in  the  shape 
of  deposits. 

It  may  be  objected  that  the  deposits  have  to 
come  first  before  the  banks  can  make  advances. 
Does  this  necessarily  follow  ?  Even  if  a  bank 
were  starting  business  to-day,  it  would  begin 
with  a  certain  amount  of  capital  which  would 
probably  be  paid  to  it  in  the  form  of  cheques 
on  other  banks.  By  means  of  these  cheques 
it  would  possess  itself  of  a  balance  at  the 
Bank  of  England  and  also,  probably,  a  certain 
amount  of  legal  tender  cash  in  the  form  of 
notes.    Bank    of    England   or   Treasury,   and 


ADVANCES   AND    DEPOSITS     45 

coin.  It  would  then  be  in  a  position  to  make 
advances  to  a  certain  extent  without  having 
received  any  deposits,  and  its  customers  paying 
into  it  cheques  on  other  banks,  the  right  to 
draw  which  had  been  conferred  by  advances 
from  them,  would  increase  its  deposits  in  the 
manner  above  described.  And  in  the  case 
of  an  existing  bank,  which  already  has  a 
large  holding  of  cash  in  hand  at  the  Bank 
of  England,  it  is  certainly  in  a  position  to 
make  an  advance  without  waiting  to  receive 
a  further  deposit  first.  It  comes  to  this  that, 
whenever  a  bank  makes  an  advance  or  buys  a 
security,  it  gives  some  one  the  right  to  draw  a 
cheque  upon  it,  which  cheque  will  be  paid  in 
either  to  it  or  to  some  other  bank,  and  so  the 
volume  of  hanking  deposits  as  a  whole  will  be 
increased  and  the  cash  resources  of  the  banks 
as  a  whole  will  be  unaltered. 

It  does  not  follow  that  this  is  the  only 
means  by  which  the  deposits  of  the  banks  and 
the  cheque  currency  by  which  they  are  passed 
from  hand  to  hand  can  be  increased.  That 
will  also  follow  if  gold  is  imported,  the  effect  of 
which  will  be  that  the  party  to  whom  it  is 
sent  will  probably  deliver  it  to  the  Bank  of 
England  and  pay  into  his  own  banker  a  draft 
upon  the  Bank  of  England  for  its  value.  This 
will  certainly  be  the  process  if  the  import  of 


46     THE  PROVISION  OF  CURRENCY 

gold  is  in  the  form  of  bars.  If  it  is  in  the 
form  of  sovereigns  it  may,  very  likely,  be  paid 
straight  into  the  receiver's  own  bank.  In 
either  case  the  banker  will  hold  a  larger 
amount  of  cash,  either  in  hand  or  at  the  Bank 
of  England,  and  the  customer  will  be  credited 
with  a  like  amount  on  his  current  or  deposit 
account. 

It  may  also  happen,  at  times  when  trade  is 
quiet,  that  coin  and  notes  which  have  been  in 
circulation  may  be  paid  into  banks  and  accu- 
mulate there  and  so  increase  the  amount  of 
the  banks'  cash  on  the  one  side  and  deposits 
on  the  other.  But  these  movements  are  com- 
paratively small  in  the  total  of  banking  figures, 
and  the  growth  of  deposits  is  chiefly  affected 
by  the  action  of  the  banks  in  making  advances 
or  increasing  their  holding  of  securities.  In 
the  ordinary  business  of  life  it  does  not  happen 
to  anybody  except  shopkeepers  and  other  retail 
dealers  to  pay  actual  cash  into  their  banking 
account.  To  take  my  own  example  as  an 
average  salary-earner,  it  has  never  happened 
to  me  in  the  course  of  the  thirty  odd  years  in 
which  I  have  had  a  banking  account  to  pay 
into  it  anything  but  a  cheque  drawn  on  a  bank. 
It  is  very  important  that  this  function  of  the 
banks  in  increasing  or  decreasing  by  their 
own  action  the  volume  of  bank  deposits  and 


THE  QUANTITY   THEORY       47 

consequently  of  the  cheques  that  may  be  drawn 
against  them  should  be  clearly  recognized. 
Money  at  the  bank  is  just  the  same  in  its 
practical  effect  upon  a  man's  state  of  mind  as 
money  in  the  pocket.  Money  in  the  pocket 
has  no  effect  upon  the  price  of  goods.  It  is 
only  when  it  comes  out  of  the  pocket  and  is 
exchanged  for  some  commodity  that  it  takes 
the  form  of  an  effective  demand  for  goods. 
But  the  possession  of  money  in  the  pocket  is 
likely  to  stimulate  the  human  craving  to  spend 
it,  and  it  is  exactly  the  same  thing  in  the  case 
of  bank  deposits  which  are  potential  currency, 
and  become  actual  currency  when  they  are  used 
by  the  drawing  of  cheques  upon  them. 

When  once  this  fact  is  recognized,  that 
the  banks  ar..  still,  among  other  things,  manu- 
facturers of  currency,  just  as  much  as  they 
were  in  the  days  when  they  issued  notes,  we 
see  how  important  a  function  the  banks  ex- 
ercise in  the  economic  world,  because  it  is  now 
generally  admitted  that  the  volume  of  currency 
created  has  a  direct  and  important  effect  upon 
prices.  This  arises  from  what  is  called  the 
•'  quantity  theory "  of  money,  which  has  long 
been  accepted  as  a  truism  by  economists  and, 
though  it  is  still  occasionally  called  in  question, 
it  can  only,  as  it  seems  to  me,  be  upset  if  it  is 
complicated  by  irrelevant  issues. 


48     THE  PROVISION  OF  CURRENCY 

The  quantity  theory  of  money  seems  to  me 
to  be  entirely  clear  and  convincing  to  common- 
sense  if  we  keep  it  sufficiently  broad  and  simple, 
and  express  it  by  saying  that,  if  the  volume 
of  money  is  increased  more  rapidly  than  the 
volume  of  goods  coming  to  market,  then  there 
will  be  a  general  rise  in  the  price  of  goods  and 
vice  versa.  But  in  order  that  it  may  be  true, 
it  is  necessary  that  the  word  **  money  "  should 
be  taken  in  the  broad  sense  in  which  I  have 
used  it,  i.e.  all  articles,  whether  coin  or  pieces 
of  paper,  which  are  commonly  taken  in  ex- 
change for  goods.  Failure  to  treat  the  pro- 
blem on  this  broad  and  simple  line  constantly 
leads  to  confusion. 

It  has  been  argued,  for  example,  by  an 
economic  professor  who  has  lately  written  a 
very  interesting  book  on  the  subject  of  money, 
that  the  quantity  theory  seems  to  have  been 
disproved  by  the  events  of  the  present  war. 
Professor  Todd,  in  his  Mechanism  of  Exchange ^ 
p.  1 66,  remarks  : — 

"  It  must  next  be  asked  whether  the  experience 
of  the  war  has  had  any  effect  upon  the  theory 
either  in  the  direction  of  confirming  it  or  otherwise. 
Certainly  the  facts  are  sufficiently  striking,  and  at 
first  sight  they  seem  entirely  incapable  of  any  ex- 
explanation  which  would  be  in  the  least  consistent 
with  the  theory.     For  the  facts  are  that  the  general 


THE    QUANTITY   THEORY       49 

level  of  prices  has  risen  since  the  war  beyond  all 
experience  in  modern  times,  while  the  gold  output 
has  remained  practically  as  it  was  before  the  war." 

Professor  Todd  is  by  no  means  the  first 
who    has    complicated    the    simplicity  of   the 
quantity   theory   by   considering    that    it    can 
only  be  shown  to  be  true  if  a  direct  relation 
can  be  shown  between  the  quantity  of  gold 
and  the  movement  of  prices.     It  is  at  all  times 
easy  to  question  this  contention,  because   the 
quantity  of  credit  created  by  bankers  does  not 
necessarily  vary  exactly  with  the  amount  of 
gold  that  is  available  for  its  basis  ;  and  in  war 
time,  when  for  patriotic  and  other  reasons  gold 
can  be  husbanded  for  war  purposes,  and  credit 
can  be  created  with  much  less  attention  than 
usual  to  the  question  of  a  gold  basis  for  it,  the  ' 
relation  between  gold  and  prices  is  more  than 
ever  elusive.     Nevertheless,  if  we  take  money 
in  the  wide  sense  in  which  it  is  used  in  this 
chapter,  as  including  all  forms  of  currency,  and 
especially  cheques,  that  are  taken  in  payment 
for  goods,  it  appears  to  me  that  the  quantity 
theory  is  so  true  as  to  amount  to  a  truism. 
It  merely  comes   to   this :    Money   is  created 
faster  than  goods ;  there  is  more  money  in  the 
hands  of  the  community  that  is  purchasing  the 
goods  ;  their  purchasing  power  is  consequently 
increased,  while  at  the  same  time  the   ^uantity 


50     THE  PROVISION  OF  CURRENCY 

of  goods  to  be  purchased  remains  stationary 
or  is  diminished.  That  a  rise  in  prices  should 
follow  from  such  a  process  seems  to  be  as 
inevitable  as  anything  in  economic  science. 

It  is,  however,  often  contended  that  a  rise 
in  prices,  for  example  during  war  time,  would 
ha*v.  happened  anyway  owing  to  the  increased 
demand  for  certain  commodities,  and  that  the 
increase  of  currency  followed  this  rise  in  prices, 
being  necessitated  or  justified  by  it,  and  that 
therefore  the  rise  in  prices  came  first  and 
caused  the  increase  in  currency. 

This  argument  appears  to  me  to  ignore 
the  fact  that  a  general  rise  in  prices  is  only 
possible  if  there  is  a  general  increase  in 
effective  demand,  a  demand,  that  is  to  say,  on 
the  part  of  people  who  have  money  in  their 
hands  with  which  to  bid  and  to  buy,  and  that 
this  increased  demand  cannot  happen  unless 
there  is  an  increase  in  available  currency.  As 
John  Stuart  Mill  says,  "The  demand  which 
influences  the  prices  of  commodities  consists 
of  the  money  offered  for  them."  *  Unquestion- 
ably the  changes  in  consumption  that  war 
brings  about  would,  without  any  increase  in 
currency,  have  produced  a  rise  in  the  prices 
of  certain  commodities.  Food,  for  example, 
being   consumed   on  a  much   more   generous 

*  Political  Economy,  Book  III.,  ch.  xii.  §  2. 


THE    QUANTITY  THEORY       51 

scale  by  soldiers  in  training  or  in  the  field 
than  it  was  by  the  same  men  in  civil  life,  and 
a  more  generous  diet  being  also  required  by 
the  industrial  population  owing  to  the  strain 
on  its  energy  in  the  production  of  munitions, 
would  certainly  have  risen  in  price  on  or  soon 
after  the  outbreak  of  war.  But  if  there  had 
been  no  accompanying  increase  in  the  currency, 
it  surely  would  have  happened  that  the  larger 
volume  of  money  absorbed  by  the  purchases  of 
food  at  the  higher  prices  current  would  have 
reduced  the  amount  of  money  available  for 
purchases  of  other  goods,  and  that  consequently 
a  fall  in  their  prices  would  have  compensated 
for  the  rise  in  the  prices  of  food.  If  this  be  so, 
then  a  general  rise  in  prices,  such  as  has  been 
seen  during  the  course  of  the  present  war, 
could  only  be  accounted  for  by  the  fact  that 
all  the  belligerent  Governments  have  been,  with 
or  without  the  help  of  the  banking  machinery 
of  their  countries,  increasing  very  rapidly  the 
use  of  the  printing  press  and  the  activities  of 
the  bankers'  ledger  clerks  who  chronicle  the 
creation  of  banking  credit. 

By  this  process  the  said  belligerent  Govern- 
ments were  enabled  to  collect,  either  from  the 
banks  or  from  the  pockets  of  their  citizens, 
large  amounts  of  gold  which  were  no  longer 
needed    for    currency    and    to    ship    them    to 


52     THE  PROVISION  OF  CURRENCY 

neutral  countries,  so  that  an  enormous  bloated 
balloon  of  world-wide  inflation  was  created, 
since  in  all  countries  of  the  civilized  world  the 
same  phenomenon  was  visible  of  an  increase 
in  currency,  either  produced  by  the  printing 
press  or  book-keeping,  or  by  abnormal  imports 
of  gold,  and  at  the  same  time  either  a  diminu- 
tion in  the  production  of  goods  owing  to  the 
absorption  of  man-power  into  the  armies,  or  in 
the  neutral  countries,  an  increase  in  produc- 
tion, which,  being  hampered  by  the  difficulty 
of  obtaining  raw  material,  did  not  keep  pace 
with  the  increase  in  the  amount  of  currency 
available. 

It  may  be  that  it  is  dangerous  to  simplify 
the  quantity  theory  too  severely.  It  is  some- 
times possible  to  arrive  at  simplicity  and  clear- 
ness by  ignoring  facts  which  ought  to  be  taken 
into  account.  We  must  not  forget  that  an 
increase  in  currency  will  have  no  effect  upon 
prices  if  the  currency  is  not  turned  over ;  that 
money  in  our  pockets  or  at  our  bank  as 
balances,  though  it  has  a  psychological  effect 
upon  our  readiness  to  spend,  has  no  actual 
effect  upon  prices  until  we  make  use  of  it  in 
order  to  buy,  and  that,  on  the  other  hand, 
although  it  may  be  said  that  the  quantity  of 
goods  coming  forward  for  consumption  is  to  a 
certain  extent  limited  by  the  productive  power 


THE    QUANTITY   THEORY       53 

of  the  country  and  of  its  neighbours  with 
which  it  deals,  yet  there  are  at  all  times  in  all 
countries  a  great  mass  of  goods,  in  the  widest 
sense  of  the  word,  such  as  houses  and  securities, 
which  may  at  any  time  come  into  the  market. 

It  seems  to  me,  however,  that  these  con- 
siderations, though  they  must  not  be  lost  sight 
of,  do  not  in  any  way  shake  the  truth  of 
the  quantity  theory  as  a  broad  principle.  If 
a  larger  quantity  than  usual  of  the  commodities, 
such  as  houses,  which  do  not  often  change 
hands,  come  into  the  market,  that  would 
simply  mean  that  the  supply  of  goods  for  sale 
would  be  thereby  to  that  extent  increased  for 
the  time  being,  and  that  these  sales  would 
check  and  perhaps  reverse  any  rise  in  prices 
that  had  previously  been  caused  by  currency 
inflation.  But  if  we  keep  our  attention  fixed 
hard  upon  the  fact  that,  however  much  a  man 
may  covet  and  desire  to  possess  an  article 
that  he  sees  for  sale,  he  cannot  exercise  any 
economic  effect  upon  it  unless  he  produces 
some  form  of  currency  wherewith  to  purchase 
it,  it  then,  surely,  follows  that  a  general  rise 
in  prices  can  only  happen  if  this  power  to 
purchase  is  increased  by  an  addition  to  the 
volume  of  currency. 

If,  then,   the  quantity   theory  is,  as    I    be- 
lieve,  broadly  true,   we    see  how  great  is   the 

E 


54    THE  PROVISION  OF  CURRENCY 

responsibility  of  the  bankers  as  manufacturers  of 
currency,  seeing  that  by  their  action  they  affect, 
not  only  the  convenience  of  their  customers 
and  the  profits  of  their  shareholders,  but  the 
general  level  of  prices.  If  the  banks  create 
currency  faster  than  the  rate  at  which  goods 
are  being  produced,  their  action  will  cause  a 
rise  in  prices  which  will  have  a  perhaps  dis- 
astrous effect  upon  the  lives  of  those  who  are 
struggling  with  a  bare  margin  of  subsistence, 
and  may  produce  industrial  unrest  with  social 
and  political  consequences  which  may  be  far 
reaching  and  serious. 

In  normal  times,  the  process  of  over-pro- 
duction of  currency,  or  inflation  as  it  may  for 
short  be  called,  is  usually  corrected  if  it  is 
confined  to  any  particular  country,  because  the 
effect  of  it  is  to  raise  prices  in  that  country 
above  the  world  level  and  so  to  increase  im- 
ports into  it  and  check  exports  from  it.  By 
this  process,  in  the  first  place,  goods  pour  into 
the  country  and  so  check  the  disproportion 
between  goods  and  currency,  and  a  further 
consequence  is  that  the  course  of  the  ex- 
changes goes  against  the  country  in  which 
inflation  is  practised ;  gold  is  drawn  away 
from  it,  and  an  automatic  remedy  is  thus  very 
opportunely  prescribed  for  the  disease  by  the 
beautifully  balanced  working  of  the  mechanism 


THE    QUANTITY   THEORY       55 

of  exchange.  But  as  it  is  probably  usual  that 
the  state  of  mind  in  which  bankers  over- 
produce currency  is  general  throughout  the 
civilized  world,  which  is  now  knit  by  the 
telegraph  into  not  only  one  great  market  but 
into  one  great  mob,  swayed  at  the  same  time 
by  similar  influences,  similar  optimisms  and 
similar  fallacies,  it  is  more  than  likely  that  this 
nicely  balanced  process  of  correction,  which 
applies  itself  readily  enough  if  inflation  is  only 
practised  in  one  country,  will  fail  to  work  when 
inflation  is  busy  all  over  the  world. 

Since,  then,  variations  in  the  quantity  of 
currency  have  these  widespread  effects,  it  is  a 
matter  which  bankers  have  to  consider  seri- 
ously, how  far  it  is  possible  for  them  to  apply 
some  scientific  regulation  to  the  volume  of 
currency,  and  whether  it  is  possible  to  modify 
the  evils  that  follow  from  wide  fluctuations  in 
prices  by  some  such  regulation. 

It  may  be  observed  that,  on  the  whole,  the 
effect  of  a  moderate  and  steady  process  of 
inflation  acts  as  a  tonic  for  the  economic  body. 
If  it  be  true  that  a  slight  excess  of  currency 
creation  ahead  of  the  production  of  goods 
causes  a  slight  and  steady  advance  in  prices, 
then  we  see  that  it  is  exactly  the  state  of 
things  required  in  order  to  stimulate  the 
activity  of  production,  give  manufacturers  and 


56     THE   PROVISION  OF  CURRENCY 

merchants  confidence  in  the  course  of  prices 
and  so  increase  their  readiness  to  indulge  in 
fresh  enterprise,  open  up  new  fields  of  pro- 
duction, pay  good  wages  to  their  workers,  and 
so  at  the  same  time  increase  the  volume  of 
goods  for  consumption  on  which  mankind's 
welfare  depends  and  improve  their  distribution, 
which  is  so  important  to  the  general  content- 
ment. All  these  things  could  be  secured  if  we 
could  be  sure  that  all  new  currency  created  by 
bankers  was  placed  at  the  disposal  of  genuine 
producers,  who  would  make  use  of  it  in  order 
to  increase  the  volume  of  goods,  and  so  help 
to  maintain  equilibrium  between  goods  and 
currency. 

Such  a  state  of  things  would  be  in  many 
ways  beneficial,  as  is  shown  by  the  fact  that 
it  has  been  seriously  argued  by  a  great  his- 
torian that  the  decline  and  fall  of  the  Roman 
Empire  was  really  due  to  the  lack  of  the 
precious  metals  and  the  consequent  fall  in 
prices  which  took  all  the  heart  out  of  the 
industrial  enterprise  of  the  traders  and  mer- 
chants of  those  days.  It  is  perhaps  a  little 
difficult  to  believe  that  a  mere  deficiency  in 
what  is,  after  all,  only  a  piece  of  mechanism  in 
exchange  can  have  had  so  wide-reaching  an 
effect ;  but  it  is  easy  enough  to  understand 
that  a  steady  fall  in  prices,  continued  over  long 


INDUSTRY   AND    PRICES         57 

periods,  would  produce  a  state  of  very  great 
depression  among  those  responsible  for  in- 
dustry, and  that  few  would  be  inclined  to  open 
up  fresh  productive  ventures  with  the  chance 
before  them  that,  before  their  ventures  could 
produce  anything  ready  for  the  market,  the 
market  price  would  have  run  away  from  them 
and  left  them  with  a  balance  on  the  wrong  side 
of  the  ledger. 

There  can  be  no  question  that  rising  prices 
stimulate  industry  while  falling  prices  discour- 
age it.  Rising  prices  put  money  into  the 
pockets  of  producers  and  those  who  are  re- 
sponsible for  keeping  the  wheel  of  industry 
spinning,  and  it  takes  it  out  of  the  pockets  of 
the  rentier  class  living  on  the  interest  of  saved 
or  inherited  money.  Between  these  two 
classes  there  is  no  doubt  as  to  the  interest  of 
which  should  be  encouraged  from  the  point  of 
view  of  human  progress.  But  we  have  to 
remember  that  the  rentier  class,  thou^rh  not 
apparently  as  useful  as  the  active  producer 
who  is  putting  all  his  energy  into  making 
goods  for  our  consumption,  is  nevertheless 
essential  to  the  progress  of  industry.  If  the 
course  of  currency  creation  is  such  that  a  man 
who  is  living  on  invested  funds  gets  a  smaller 
and  smaller  share  of  the  world's  goods  in 
return    for    the    money    that    he    receives    in 


58     THE  PROVISION  OF  CURRENCY 

interest,  then  the  process  of  accumulation  and 
the  saving  of  capital  may  be  checked,  and  it 
will  be  shown  in  a  later  chapter  how  this  pro- 
cess of  saving  is  necessary  if  the  progress  of 
industry  is  to  be  maintained. 

There  is  another  highly  important  con- 
sideration attaching  to  this  question  of  a 
general  rise  in  prices  produced  by  currency 
inflation,  and  that  is  the  fact  that  experience 
shows  that  the  movement  of  wages  does  not 
as  a  rule  keep  pace  with  the  movement  of 
prices  but  lags  behind  them,  usually  by  an  in- 
terval of  three  to  six  months.  As  long  as  this 
is  true,  falling  prices  are  an  advantage  to  the 
working  classes  and  rising  prices  are  against 
them,  and  so  rising  prices  tend  to  produce 
dissatisfaction  and  industrial  unrest.  It  is  well 
known  that,  in  England,  for  some  ten  years 
before  the  present  war,  though  money  wages 
had  slowly  risen,  the  rise  in  prices  had  gone 
faster,  that  the  working  classes  were  highly 
dissatisfied  with  this  state  of  affairs  and  that, 
if  the  war  had  not  happened,  there  was  every 
appearance  of  an  outbreak  of  industrial  strife 
on  a  scale  that  had  never  before  been 
witnessed.  It  is  possible  that,  as  the  organiza- 
tion and  education  of  the  working  classes  pro- 
gresses, they  may  be  able  to  correct  this 
tendency  for  wages  to  lag  behind  prices  when 


STEADINESS   THE    IDEAL       59 

prices  are  moving  upwards.  But  as  things  are, 
the  fact  that  rising  prices,  if  continued  too  far 
and  too  long,  tend  to  check  accumulation  and  to 
produce  industrial  unrest,  is  a  very  serious  draw- 
back to  put  on  the  other  side  of  the  account  as 
against  the  encouragement  that  they  give  to  the 
energetic  producer  and  to  those  who  benefit 
from  the  extra  profits  produced  by  higher  prices. 
This  being  so,  the  ideal  to  be  aimed  at 
would  seem  to  be  steadiness  in  prices ;  in  other 
words,  it  is  the  business  of  finance  to  consider 
whether  it  cannot  regulate  the  general  level  of 
prices  by  somehow  maintaining  more  or  less 
constant  equilibrium  between  the  production  of 
goods  and  the  creation  of  currency.  If  all 
currency  creation  consisted  of  bankers'  credits, 
then  it  would  clearly  be  possible  for  an  ideal 
banking  system,  worked  by  ideal  bankers,  for 
the  convenience  of  ideal  customers,  to  produce 
the  required  equilibrium,  or  very  nearly.  If 
they  satisfied  themselves  every  time  that  they 
made  an  advance  that  the  credit  so  created 
was  going  to  be  used  in  increasing  the  pro- 
duction of  goods,  the  problem  would  be  in  a 
fair  way  to  solution.  But,  in  the  first  place, 
the  relations  between  bankers  and  customers 
do  not  at  present  permit  this  simple  process  of 
regulation,  and,  in  the  second,  as  we  have 
seen,  the  manufacture  of  currency,  though  to 


6o     THE  PROVISION  OF  CURRENXY 

a  great  extent  in  the  hands  of  the  bankers,  is 
subject  to  conditions  over  which  they  have  no 
control.  One  of  these  conditions  is  the  amount 
of  gold  available.  When  the  production  of 
gold  is  rapidly  increased,  not  only  is  there  so 
much  extra  buying  power  in  the  form  of  coins 
struck  from  the  gold,  but,  since  the  increase  in 
the  gold  available  enables  bankers  to  issue  a 
very  much  larger  amount  of  paper  credit 
against  it,  it  follows  that  activity  on  the  part  of 
gold  miners  has,  or  may  have,  an  effect  upon 
world  prices  which  is  much  greater  than  the 
actual  addition  to  currency  which  they  them- 
selves take  out  of  the  bowels  of  the  earth.  It 
seems  at  first  siofht  absurd  that  at  this  staoe  of 
our  economic  civilization  such  an  important 
matter  as  world-wide  price  movements  should 
depend  upon  the  pace  at  which  a  certain  kind 
of  metal  is  dug  out  by  miners ;  and  in  these 
times,  when  there  is  a  general  tendency  to 
question  and  criticize  all  human  institutions, 
the  dependence  of  man  on  gold  as  an  essential 
part  of  the  machinery  of  finance  is  naturally 
scoffed  at  by  the  sceptical  and  pointed  to  as  a 
clumsy  survival  of  medieval  or  even  neolithic 
barbarism.  It  has  even  been  suggested  that 
the  experience  of  the  war  may  lead  the  way  to  a 
general  de-monetization  of  gold  and  the  substi- 
tution for  it  of  a  scientifically  regulated  currency 


THE   GOLD    HABIT  6i 

It  Seems  to  me  that  the  financial  and  in- 
dustrial problems  which  will  face  us  when  the 
war  is  over  are  quite  serious  and  difficult 
enough  without  complicating  them  still  further 
by  an  attempt  to  institute  a  currency  reform, 
or  change,  which  might  have  consequences 
quite  unforeseen.  It  is  the  uncomfortable 
habit  of  economic  changes  to  run  away  with 
those  who  introduce  them  and  produce  results 
often  quite  contrary  to  the  intentions  of  the 
reformers.  Gold  has  got  such  influence  upon 
the  human  mind,  owing  to  centuries  of  habit 
and  convention,  that  it  is  still  regarded  as  the 
one  commodity  which  can  always  certainly  be 
relied  upon  in  times  of  acute  crisis.  Even 
now,  when  it  has  been  made  clear  that  it  is 
every  one's  duty  to  pay  in  all  the  gold  they 
possess  through  their  bankers,  so  that  it  may 
be  used  for  war  purposes,  I  have  been  lately 
told  by  many  quite  reasonable  people  in 
England,  among  them  an  economic  professor, 
that  they  are  still  keeping  a  few  sovereigns 
locked  up  in  case  of  anything  that  may  happen. 
I  believe  this  prejudice  in  favour  of  gold  to  be 
so  ingrained  that  any  attempt  to  try  to  hasten 
the  process  by  which  substitutes  for  gold  are 
used,  these  substitutes  being  mere  tokens 
issued  by  a  Government  with  no  promise  to 
pay  gold  behind  them,  might  have  disastrous 


62     THE  PROVISION  OF  CURRENCY 

effects.  It  will  be  a  great  economy  if  the  day 
ever  comes  when  peoples  have  sufficient  con- 
fidence in  their  Governments  and  in  their 
bankers  to  feel  sure  that  pieces  of  paper  issued 
by  them  will  always  be  taken  in  exchange  for 
goods  without  any  intermediate  process  of 
exchange  into  gold  and  the  exchange  of  the 
gold  into  goods.  But  it  seems  to  me  that  it 
will  take  about  a  century  of  economic  educa- 
tion before  we  can  arrive  at  that  ideal,  and  that 
if  in  the  meantime  we  try  to  take  short  cuts 
we  might  find  ourselves  landed  in  a  very  un- 
comfortable position. 

An  obvious  first  step  would  be  to  cease 
tli^  coining  of  gold  for  internal  use  and  to 
make  credit  instruments  convertible  into  bar 
gold  for  purposes  of  international  payment. 

But  it  is  the  business  of  those  who  are 
responsible  for  the  machinery  of  finance,  in 
the  first  place,  to  work  it  in  such  a  manner 
that  equilibrium  between  goods  and  currency 
shall  be  as  far  as  possible  maintained,  so  that 
the  course  of  prices  may  be  kept  steady  and 
that  the  even  progress  of  mankind's  economic 
development  may  be  as  little  as  possible  dis- 
turbed by  wild  fluctuations  from  periods  of 
excessive  optimism  and  boom  with  their 
inevitable  reactions  into  depression,  occasion- 
ally intensified  by  panic. 


CHAPTER   III 

CREDIT 

In  the  last  chapter  it  was  shown  that  the  most 
important  of  the  modern  forms  of  currency, 
namely  the  cheque,  is,  in  effect,  manufactured 
for  the  use  of  its  customers  by  banks  ;   and, 
further,  that  since  the  volume  of  currency  has 
an    important  effect    upon   raising  prices,   th^ 
extent  to  which  currency  is  thus  created  is  a 
responsibility  which  has   to  be  seriously  con- 
sidered   by    those    who    work    the    financial 
machine.      This    manufacture    of   currency   is 
worked  through   the   granting   of  credit,   and 
credit  may  thus  be  defined,  for  the  purposes 
of  this  inquiry,  as  the  process  by  which  finance 
makes    currency    for    its    customers.      As    we 
saw   in   the  last  chapter,  deposits,   which  are 
potential  currency  as  they  carry  with  them  the 
right  to  draw  a  cheque,  are  produced  largely 
through  the  loans,  discounts  and  investments 
made  by  bankers.     In   the  ordinary   sense  of 
the  word,  credit  usually  carries  a  wider  meaning, 


64  CREDIT 

covering  any  kind  of  arrangement  by  which 
a  seller  takes  from  the  party  who  wishes 
to  secure  goods  from  him  some  form  of  en- 
gagement that  payment  for  the  goods  will  be 
made  at  a  future  date.  In  this  sense  of  the 
word  it  is  a  credit  operation  when  a  shop- 
keeper sells  me  a  suit  of  clothes  on  the  under- 
standing that  he  will  send  me  in  an  account 
some  months  later  in  the  expectation  that  I 
shall,  at  some  time  or  other  after  the  bill  has 
been  presented,  pay  for  it.  Operations  of  this 
kind,  however,  though  of  considerable  import- 
ance in  the  volume  of  commercial  transac- 
tions, do  not  come  within  the  purview  of  the 
machinery  of  finance.  Credit,  in  the  truly 
financial  sense,  is,  as  described  above,  the 
arrangement  by  which  the  financial  machinery 
gives  its  customers  facilities  which  enable  them 
to  provide  themselves  with  currency  to  go  into 
the  market  and  buy  commodities,  securities,  or 
anything  else  that  they  want,  or  think  they 
want. 

In  order  to  see  more  clearly  the  method  by 
which  these  arrangements  are  made,  let  us 
look  at  a  balance  sheet  of  what  was  then  the 
biggest  English  bank  at  the  end  of  June,  19 14, 
before  the  war  period  began  to  complicate  and 
expand  banking  figures.  On  the  liabilities  side 
we  find  the  following  items  : — 


A    BANK    BALANCE    SHEET      65 

Current,  Deposit  and  other  Accounts  ...  107  millions. 

Bills  accepted  or  endorsed        ...  ...  4          » 

Capital          ...             ...             ...  ..•  5          >» 

Reserve        ...            ...            ...  •••  32        » 


119^ 


The  Assets  were  as  follows  :- 


Cash  in  hand  and  at  Bank  of  England  ...  18    millions. 
Liabilities  of  Customers  for  bills  accepted 

or  endorsed         ...            ...            ...  4  » 

Premises     ...             ...             ...             ...  3  » 

Investments               ...            ...             ...  13  » 

Cash  at  call  and  short  notice  ...             ...  lo.J^  „ 

Bills  of  Exchange     ...            ...             ...  I4i  »» 

Advances  to  Customers          ...            ...  56 J  „ 

ii9i 

If  we  examine  this  balance  sheet  we  see 
that  the  bank's  own  capital  and  reserve  amount 
to  8^  millions,  and  that  it  has  accepted  Bills — 
a  process  which  will  be  explained  later — to  the 
extent  of  4  millions,  and  that  the  rest  of  its 
liabilities  consist  of  the  principal  item.  Current 
and  Deposit  Accounts,  for  107  millions.  The 
other  side  shows  that  it  has  made  advances  in 
the  shape  of  Cash  at  call  and  short  notice, 
Bills  of  Exchange  and  Advances  to  Customers, 
for  a  total  of  8rJ  millions,  and  that  its  invest- 
ments amount  to  13  millions;  so  that  against 
its  deposits  of  107  millions  we  find  assets 
which  are,  in  one  form  or  another,  loans  and 
investments  amounting  to  94J  millions. 

Examining    more   closely    the    process    by 


66  CREDIT 

which  these  loans  and  investments  have  been 
made,  we  see  that  the  chief  item  in  the  process 
is  the  big  item,  Advances  to  Customers,  of 
S6^  millions.  This  item  explains  itself,  being 
obviously  loans  made  to  the  customers  of  the 
bank  against  any  collateral  pledge  that  the 
bank  may  think  adequate,  or  possibly,  in  some 
cases,  merely  against  the  good  faith  and  known 
high  financial  position  of  a  customer. 

What  the  bank  describes  as  "  Cash  at  call 
or  short  notice  "  consists  in  fact  of  loans  to  bill 
brokers  and  stock  brokers,  who  finance  by 
credits  granted  by  the  banks,  their  holdings 
of  bills  of  exchange,  if  bill  brokers,  or  the 
holdings  of  securities,  in  the  case  of  the  stock- 
brokers, which  their  clients  or  themselves  have 
purchased  in  the  hope  of  a  rise  in  their  prices 
or  for  some  other  reason.  Loans  to  bill  brokers 
are  closely  connected  with  the  subject  of  the 
bill  of  exchange,  which  has  to  be  now  explained 
as  a  highly  important  stone  in  the  financial 
edifice.  Originally,  as  all  men  know,  a  bill  of 
exchange  was  an  order  drawn  by  a  seller  of 
goods  ordering  his  buyer  to  pay  the  money 
due  for  the  goods  to  himself,  the  seller,  or  to 
the  order  of  any  party  to  whom  the  seller 
wished  the  money  to  be  handed.  A  sold 
goods  to  B  and  drew  a  bill  upon  him  instruct- 
ing him  to  pay  the  money  to  him,  A,  or  to  any 


THE    BILL   OF    EXCHANGE       67 

party  he  might  name.  The  original  bill  was 
thus  simply  a  memorandum,  sent  with  the 
goods,  instructing  the  buyer  as  to  how  he 
should  pay  for  them. 

Since  B  might,  in  the  ordinary  course  of 
trade,  wish  for  time  before  handing  over  the 
money,  so  that  he  might  be  able  to  dispose  of 
the  goods  to  retail  customers,  the  custom  arose 
of  instructing  B  to  pay  the  money  not  at  once 
but  at  some  date,  usually  two  to  six  months 
after  sight  of  the  bill  of  exchange.      When  B 
recognized    that   the    order   to   pay    was   one 
which    he  was    bound  to    meet,   he   intimated 
the  fact  by  "  accepting  "  the  bill,  that  is  to  say 
writing  his   name  across  the  front  of  it  and 
adding  the  date  of  acceptance.     The  date  of 
acceptance  was  thus  the  date  at  which  the  bill 
was  first  sighted,  and  so  the  life  of  the  bill,  two 
to  six  months  after  sight,  would  be  calculated 
from  this  date  of  acceptance.     The  bill  being 
thus  accepted  could  be  turned  into  cash  by  A 
or  his  agent   in   the  place   in  which  B  lived, 
through  the  means  of  the  discount  market,  in 
which  bills  drawn  and  accepted  by  people  of 
good  financial  standing  could  be  sold  for  cash 
at  a  discount  on  the  face  value  of  the  bill  calcu- 
lated according  to  the  current  rate  of  interest. 

For   instance,    if  A  drew  a  bill   on    B   for 
;{|"iooo  six  months  after  sight,  and  if  A   and 


68  CREDIT 

B,  especially  B,  who  was  first  liable  to  meet 
the  bill,  were  men  of  good  standing,  somebody 
would  be  found  who  would  give  A  or  his  agent 
;^iooo  the  day  after  acceptance  less  a  discount 
rate  which,  if  we  suppose  it  to  be  5  per  cent, 
per  annum,  would  mean  that  ^25  would  be 
taken  off  the  face  value  of  the  bill,  and  so  A 
would  immediately  become  possessed  of  ^975. 
By  this  means  A  would  get  his  money  at  once, 
B  would  get  the  goods  and  could  work  them 
up  for  sale,  if  they  were  raw  material,  or  could 
dispose  of  them  to  retail  customers  and  grant 
them  a  certain  amount  of  credit,  and  the  holder 
of  the  bill  had  a  temporary  investment  which 
was  valuable  according  to  the  standing  of  the 
parties  upon  it,  and  which  carried  the  additional 
advantage  that  on  maturity  the  money  had  to 
be  paid. 

Since  it  was  difficult  for  dealers  in  bills  to 
keep  themselves  continually  advised  concerning 
the  standing  of  merchants  in  whose  acceptances 
they  dealt,  the  custom  arose  for  certain  eminent 
financial  houses  to  specialize  in  this  business  of 
acceptance,  accepting  bills  on  behalf  of  people 
whose  financial  eminence  was  not  so  secure  in 
return  for  a  small  com.mission.  They  thus,  by 
writing  their  names  across  the  front  of  bills, 
gave  them  first-rate  standing,  enabled  the 
customer^;   who  had   paid   them  a  commission 


BANK    ACCEPTANCES  69 

to  secure  the  advantages  of  the  gilt-edged 
security  which  they  had  given  to  the  bill,  and 
provided  those  who  bought  the  bills  with  an 
even  more  unquestioned  security  than  that  of 
the  ordinary  merchant. 

In  England  it  has  long  been  the  custom 
for  the  banks  to  take  part  in  this  business  of 
acceptance,  and  we  saw  in  the  balance  sheet 
given  above  that  there  was  an  item  of  four 
millions,  **  Bills  accepted  or  endorsed,"  against 
which  the  bank  held  as  an  asset  four  millions 
in  the  form  of  the  liability  of  customers  for 
bills  accepted  or  endorsed.  This  means  to 
say  that  this  particular  bank  had  allowed 
customers  of  its  own,  probably  importing 
merchants,  to  buy  goods  chiefly  from  abroad 
and  instruct  their  sellers  to  draw  bills  against 
the  shipment  of  the  goods,  not  upon  the 
importing  merchants  but  upon  their  bank,  so 
giving  the  bank's  eminent  standing  to  grace 
the  bills  so  drawn.  The  customer,  however, 
was  himself  liable  to  put  the  bank  in  funds  to 
meet  the  bills  so  drawn  before  they  fell  due. 

If  we  take  the  case  of  a  Liverpool  merchant 
importing  cotton  from  an  American  seller,  and 
instructing  the  American  seller  to  draw  on  a 
London  bank  bills  payable  sixty  days  after 
sight,  then  the  Liverpool  importer,  having  in 
the  meantime  disposed   of   the  cotton,  would 


70  CREDIT 

have  money  in  hand  to  pay  into  the  bank  to 
meet  the  bill  before  it  fell  due.  The  bill  would 
be  drawn  by  the  American  seller,  sold  by  him 
to  an  American  bank,  shipped  by  the  American 
bank  to  its  agent  in  London  to  be  presented 
for  acceptance,  and  then  sold  in  the  London 
discount  market.  This  selling  of  the  bill 
would  take  place  through  the  medium  of  a 
bill  broker,  who  would  buy  it  either  to  hold 
himself  for  the  time  being,  or  to  sell  im- 
mediately to  one  of  the  great  London  banks 
which  are  ultimately  the  holders  of  a  large 
part  of  the  best  bills  that  come  to  London. 
As  we  see  in  the  balance  sheet  given  above, 
this  particular  bank  has  a  holding  of  bills  of 
exchange  amounting  to  14J  millions.  Thus 
the  banks  provide  the  money  which  these  bills 
of  exchange  produce,  either  by  lending  it  to 
bill  brokers  under  the  item  "  Cash  at  call  and 
short  notice,"  or  by  actually  investing  it  in 
bills  of  exchange  under  the  item  so  expressed. 
The  acceptor  of  the  bill  does  not  in  the 
normal  course  of  business  find  any  money  at 
all.  He  puts  his  name  upon  the  bill,  indicating 
that  he  will  pay  it  at  a  certain  date,  and  trusts 
to  the  customer  to  whom  he  has  lent  his  name 
for  a  consideration  to  provide  him  with  the 
money  in  order  to  meet  the  bill.  If  the 
customer  fails  to  do  so,  he  then  has  to  meet 


MANUFACTURING   CURRENCY    71 

it  out  of  his  own  funds.  The  credit  produced 
by  the  discounting  of  the  bill  is  found  by  the 
purchaser  of  the  bill,  in  most  cases  either  a 
banker  or  a  bill  broker  to  whom  a  banker  has 
advanced  the  necessary  funds. 

The  creation  of  credit  is  thus  seen  clearly 
to  result  in  the  manufacture  of  currency  when- 
ever the  banks  buy  bills  of  exchange  for 
investment,  or  make  an  advance  to  bill  brokers 
in  order  to  enable  them  to  carry  their  stock 
of  bills.  In  either  case  the  banks  give  some- 
body the  right  to  draw  cheques.  It  should  be 
explained  that  the  bill  brokers  act  largely  as 
merchants  in  bills  of  exchange,  buying  them 
wholesale  as  they  come  forward  from  the 
agents  of  the  foreign  exporters  and  gradually 
selling  them  to  the  banks  to  meet  the  require- 
ments of  the  latter  in  the  matter  of  names  and 
dates. 

When  a  bank  makes  an  advance  to  a  stock 
broker  to  assist  in  the  process  by  which 
securities  are  financed  that  have  not  yet  found 
an  ultimate  home,  the  result  is  exactly  the 
same.  The  bank  makes  an  advance  on  the 
pledge  of  the  securities  held  and  of  the  stand- 
ing of  the  stockbroker,  and  the  stockbroker  is 
thus  enabled  to  pay,  on  behalf  of  his  customer, 
the  seller  of  the  securities,  or  the  issuing  house 
which  is  bringing  out  a  new  security. 


72  CREDIT 

The  same  result,  in  rather  a  different  form, 
happens  when  a  bank  makes  investments  on 
its  own  account.  It  pays  for  the  securities 
bought,  probably  with  a  draft  on  its  balance  at 
the  Bank  of  England,  whereby  its  holding  of 
cash  at  the  Bank  of  England  is  reduced  and  its 
holding  of  securities  is  increased.  The  seller 
of  the  stock,  to  whom  it  pays  the  cheque,  pays 
it  probably  into  some  other  bank,  which  thus 
has  its  cash  at  the  Bank  of  England  increased, 
and  has  a  corresponding  increase  among  its 
deposits  on  the  other  side  of  the  balance  sheet. 
There  has  thus  been,  in  each  case,  an  increase 
in  deposits  through  the  operation  of  the  bank 
in  lending,  discounting,  or  investing.  If  we 
can  imagine  all  the  banks  suddenly  selling  all 
their  investments  and  bills  of  exchange  and 
calling  in  all  their  advances,  the  process  could 
only  be  brought  about  by  the  cancelling  of 
deposits,  their  own  and  one  another's.  And  so 
it  becomes  evident,  as  before  stated,  that  the 
deposits  of  the  banks  which  give  the  com- 
mercial community  the  right  to  draw  cheques 
are  chiefly  created  by  the  action  of  the  banks 
themselves  in  lending,  discounting,  and  in- 
vesting. 

Since,  then,  it  thus  appears  that  credit  is 
the  machinery  by  which  a  very  important  part 
of  modern    currency  is  created,  it  will  follow 


PAPER    PROMISES  T^ 

that  it  should  as  far  as  possible  be  chiefly 
placed  at  the  disposal  of  those  who  are  pro- 
ducing goods,  or  are  going  to  produce  goods, 
because,  as  has  been  shown,  if  currency  is 
created  more  rapidly  than  goods  are  produced, 
the  result  is  a  rise  in  prices  which,  if  carried 
too  far,  is  likely  to  have  evil  effects.  It  is 
the  business  of  finance  to  try  to  maintain 
something  like  steadiness  in  prices  by  aim- 
ing at  equilibrium  between  the  manufacture 
of  currency  and  the  production  of  goods. 
There  are  nowadays  very  many  schemes  for 
making  mankind  rich  and  happy  by  increasing 
the  amount  of  money  in  its  pocket ;  and  the 
experience  of  the  war,  in  which  Governments 
with  the  assistance  of  their  bankers  have 
greatly  increased  the  supply  of  currency — and 
so  have  made  huge  expenditure  an  apparently 
simple  matter — are  only  too  likely  to  tend  to 
the  adoption  of  schemes  of  this  kind  when  the 
war  is  over,  and  all  kinds  of  dangerous  short- 
cuts may  be  tried  to  find  a  way  through  the 
difficult  problems  that  will  then  arise. 

All  who  are  interested  in  the  sanity  and 
sense  with  which  finance  is  conducted  will  have 
to  do  their  best  to  impress  on  those  whose 
economic  education  is  deficient  that  you  do 
not  make  people  really  any  better  off  by 
plastering  thf  world  with  paper    promises    to 


74  CREDIT 

pay,  but  that  what  does  mankind  real  good  is 
stimulating  the  production  of  good  things  to 
put  into  its  stomach,  stout  clothes  for  it  to 
wear,  good  houses  for  it  to  live  in,  and  sound 
education  to  make  it  see  straight  in  matters  of 
finance  and  in  doing  its  duty  to  its  neighbour. 
It  is  only  by  producing  as  fast  as  possible,  a 
great  increase  in  the  store  of  good  things  to 
be  enjoyed  that  we  can  make  humanity  better 
off,  and  this  is  the  problem  to  which  finance 
has  to  address  itself  and  never  to  lose  sight  of 
in  working  its  machinery.  Increased  produc- 
tion, with  an  improvement  in  distribution,  of 
good  things  to  make  people  healthy  and  con- 
tented is  the  way  to  a  better  world  on  the 
material  side.  It  is  necessary  to  insist  on 
these  platitudes  because  producers  and  mer- 
chants— especially  merchants — have  rather  a 
prejudice  towards  the  opposite  view.  The 
thing  that  they  are  most  terribly  afraid  of,  and 
from  their  own  point  of  view  with  good  reason, 
is  the  possibility  of  a  glut  of  goods, — goods  in 
their  warehouses  that  they  cannot  sell  without 
so  serious  a  reduction  in  the  price  that  all  their 
profit  is  gone,  and  that  the  profits  of  pro- 
spective producers  might  become  so  proble- 
matical that  production  would  be  checked.  It 
is  this  fear  of  glut  which  gives  such  an  uneasy 
feeling  to  merchants  and  producers,  which  is 


THE   CURE   OF    GLUT  75 

just  as  dangerous  as  the  opposite  tendency 
to  inflation  if  currency  is  manufactured  too 
rapidly. 

The  cure  of  glut  is  obviously  to  be  found 
through  a  better  diffused  and  better  organized 
buying  power  on  the  part  of  humanity,  and  also 
by.  a  better  concentration  of  industry  upon  such 
o-oods  as  would  be  certain  of  a  market  whatever 
may  happen  to  changes  in  fashion.  Better 
diffused  buying  power  is  obviously  secured 
most  simply  by  a  steady  rise  in  wages  of 
manual  workers  and  other  comparatively  ill- 
paid  servants  of  society,  and  also  by  their 
better  education  concerning  the  things  that 
may  be  bought  out  of  their  surplus,  if  any. 
At  present  industry,  in  the  widest  sense  of  the 
word,  devotes  much  of  its  time,  energy  and 
money,  which  it  afterwards  gets  back  from  the 
public,  to  forcing  upon  the  public  goods  which 
it  thinks  the  public  ought  to  want  just  because 
it  has  produced  them  and  wants  to  sell  them. 

This  process  is  carried  out  by  the  enor- 
mously costly  system  of  advertisement,  circu- 
larizing and  other  forms  of  touting  which  now 
absorb  so  much  of  the  energy  of  the  sellers  of 
goods,  whose  services  put  perhaps  as  much  into 
the  ultimate  cost  of  the  goods  as  all  those  of  the 
original  producers  of  the  raw  material  and  of 
the    manufactured   article.      If   we   could  only 


76  CREDIT 

train  mankind  to  know  exactly  what  it  wants 
to  buy  and  could  find  some  system  by  which 
it  would  notify  these  wants  in  advance,  the 
economy  in  production  from  the  elimination 
of  the  advertiser  would  be  enormous,  the 
profit  of  the  real  producer  would  be  increased, 
while  the  price  to  the  ultimate  buyer  could  be 
reduced.  Industry  would  be  to  that  extent 
less  a  gamble  and  would  go  back  to  something 
like  the  medieval  basis  when  each  man  ordered 
in  advance  the  goods  that  he  needed,  which 
were  then  manufactured  for  him  by  the 
armourer,  or  the  tailor,  or  the  shoemaker,  or 
whoever  it  might  be,  without  any  question  of 
manufacturing  on  the  chance  of  inducing  a 
buyer  to  take  over  goods  by  hiring  some  one 
to  force  them  down  his  throat.  I  do  not  wish 
to  be  understood  as  urging  that  we  should 
really  go  back  to  a  system  of  this  kind  in  all 
its  entirety,  but  if  we  could  aim,  by  means  of 
co-operative  purchase,  education,  or  otherwise, 
at  some  system  by  which  demand  would  be 
more  reasonable  and  more  certain,  the  whole 
process  of  manufacture  would  be  greatly 
simplified  and  strengthened,  and  the  business 
of  the  financier  would  be  greatly  simplified. 

If,  then,  fear  of  glut  is  a  constant  terror  in 
the  mind  of  the  merchant  and  the  producer, 
this  does   not  seem  to  be  a  sufficient  reason 


BANKING    AND    PRODUCTION     77 

against  taking  all  measures  to  stimulate  as  far 
as  possible  the  production  of  goods,  since  it 
has  been  shown  that  it  is  only  by  the  pro- 
duction of  goods  that  the  general  welfare  of 
mankind  can  be  increased,  and  since  the 
machinery  of  finance  will  be  tested  by  this 
question,  whether  it  is  really  serving  the 
general  welfare  of  mankind.  There  cannot 
be  a  real  glut  of  goods  in  general  until  all 
man's  material  wants  are  satisfied.  Goods  are 
made  to  be  exchanged  for  goods,  and  as  long 
as  their  production  remains  fairly  level,  the 
terms  on  which  they  exchange  will  be  fairly 
level,  and  they  will  absorb  one  another,  so 
to  speak,  by  their  mutual  demand.  More 
boots  produced  will  absorb  more  wheat  grown. 
It  is  when  industry  makes  lopsided  progress 
and  the  output  of  boots  grows  faster  than  that 
of  wheat  that  glut  arises. 

There  has  of  late  been  a  good  deal  of 
question  in  England  concerning  the  extent  to 
which  the  banking  machinery  has  assisted 
production,  and  it  has  been  contended  that 
more  efficient  machinery  might  be  provided 
for  this  purpose.  On  the  whole,  it  seems  to 
me  that  these  criticisms  of  the  efficiency  of 
banking  in  this  country  largely  fell  flat.  It 
was  certainly  shown  that  there  was  room  for 
machinery  for  doing  things  which  banks  were 


78  CREDIT 

never  meant  to  do,  such  as  the  examination, 
nursing  and  preparation  of  financial  enterprises 
of  more  or  less  doubtful  possibility  which  might, 
with  financial  assistance,  develop  into  useful 
industry.  It  is  not  the  business  of  banking  to 
take  risks  of  this  kind  in  view  of  the  great 
liabiHty  which  the  deposits  entrusted  to  them 
by  the  public  devolve  upon  them.  There 
certainly  was  room  for  some  kind  of  financial 
creche  in  which  interesting,  but  possibly  rickety, 
infants  might  have  their  first  toddling  footsteps 
guided,  and  on  this  subject  and  on  the  whole 
question  of  the  machinery  for  company  pro- 
motion there  will  be  more  to  be  said  in  a  later 
chapter.  It  is  the  business  of  the  banks  to  do 
all  that  they  can  in  their  power  to  assist  pro- 
duction, but,  at  the  same  time,  never  to  forget 
that  that  big  item  of  "  Current  and  Deposit 
Accounts  "  is  their  first  responsibility.  Never- 
theless they  can  do  much  by  the  bills  that  they 
accept,  the  bills  that  they  buy,  and  the  loans 
and  advances  that  they  make  to  regulate  the 
machinery  of  finance  in  such  a  way  that  pro- 
duction shall  have  the  first  call  upon  its  out- 
put, that  is  to  say,  of  the  currency  that  it  creates 
for  its  customers.  On  the  whole,  there  can  be 
no  doubt  that  production  has  no  fair  charge  of 
neglect  to  lay  at  the  door  of  the  banking 
machine.     Nevertheless  there  is  no  harm    in 


BANKING   AND    PRODUCTION     79 

laying  stress  upon  the  importance  to  the  bank- 
ing world  of  keeping  this  object  always  in  view. 
It  may  lead  to  misapprehension  if  the  banks 
are  thought  to  be  too  closely  connected  with 
the  machinery  of  stock  exchange  speculation 
and  the  machinery  of  speculation  in  the  produce 
markets.  If  ever  banking  is  called  upon  to 
render  an  account  of  its  stewardship,  it  can  do 
so  most  effectively  by  showing  that  it  has  used 
its  great  power  of  creating  currency  in  such  a 
way  that  it  has  been  devoted  chiefly  to  the 
production  of  more  goods  for  the  enjoyment  of 
man,  and  that  the  equilibrium  between  goods 
and  currency,  which  a  former  chapter  has  shown 
to  be  desirable,  has  thereby  been  furthered  or 
secured. 


CHAPTER    IV 

CAPITAL 

In  the  minds  of  many  people  the  h'ne  which 
divides  credit  from  capital  is  hazy.  This  is 
largely  owing  to  the  exasperating  habit  of 
economic  and  financial  jargon  which  constantly 
insists  upon  talking  about  different  thin2s  by 
the  same  name.  Credit  operations  are  often 
spoken  of  as  including  all  the  processes  carried 
out  by  the  mechanism  of  finance.  But  I  think 
that  there  is  in  fact  a  very  real  distinction 
between  credit  and  capital.  By  means  of 
credit,  as  was  shown  in  the  last  chapter, 
borrowers  are  supplied  by  the  machinery  of 
finance  with  the  right  to  draw  cheques,  or  to 
handle  other  forms  of  currency.  That  is  to 
say,  by  means  of  credit  currency  is  manu- 
factured for  the  use  of  industry  and  of  other 
users  of  credit  by  the  financial  machine.  There 
is  an  essential  difference  between  this  process 
and  that  by  which  capital  is  placed  at  the  dis- 
posal of  industry.     We  may  put  it  shortly  by 


DIFFERENT   SENSES  8i 

saying  that  the  machinery  of  credit  manu- 
factures currency  or  buying  power ;  while 
capital  hands  over  currency  or  buying  power 
to  industry.  The  creation  of  capital  thus  im- 
plies on  the  part  of  somebody  an  act  of  absti- 
nence :  he  refrains  from  spending  money  on 
immediate  consumption,  and  hands  it  over  to 
somebody  else  to  be  spent,  or  spends  it  him- 
self, on  some  industrial  or  national  purpose. 
This  is  the  sense  in  which  capital  will  be  used 
in  the  present  chapter  and  throughout  this 
book. 

But,  as  need  hardly  be  said,  capital  also  is 
one  of  the  terms  which  economic  and  financial 
language  has  exercised  its  highest  ingenuity 
in  using  in  different  senses.  One  of  the  earliest 
descriptions  of  capital  was  given  by  Turgot, 
the  French  practical  economist,  who  defined 
it  as  "valeurs  accumuldes."  In  this  sense,  of 
course,  it  applies  practically  to  all  forms  of  what 
is  commonly  called  wealth  :  that  is  to  say,  all 
accumulated  property  which  has  an  exchange 
value,  that  is,  can  be  sold  at  a  price.  In  this 
sense  capital  would  include  houses,  clothes, 
furniture,  books :  all  the  instruments  and 
machinery  of  comfort  and  enjoyment.  In 
one  sense  the  pearl  necklace  worn  by  the 
millionaire's  wife  is  certainly  capital  :  it  is  an 
investment   which  returns  no  interest,  but    it 


82  CAPITAL 

grows  in  value,  sometimes,  and  it  can,  if  any- 
thing goes  wrong  with  the  millionaire's  enter- 
prises, be  turned  into  goods  on  which  he  and 
she  can  live. 

Nevertheless,  in  ordinary  business  language 
capital  is  used  in  a  narrower,  and  it  seems  to 
me  in  a  truer,  sense  in  which  it  has  also  re- 
ceived theoretical  economic  endorsement  from 
John  Stuart  Mill  and  others.  This  in  the 
sense  of  wealth  applied  to  the  production  of 
further  wealth :  in  other  words,  capital  covers 
the  tools  and  equipment  of  industry  in  the 
widest  sense  of  the  word,  including  agriculture 
and  transport.  This  equipment  of  industry 
can  only  be  produced,  maintained  and  in- 
creased, if  the  community,  or  a  certain  number 
of  members  of  it,  refrain  from  immediate  con- 
sumption and  enjoyment,  and  place  the  labour 
and  energy,  which  they  would  otherwise  have 
employed  for  their  own  gratification,  at  the 
disposal  of  industry  for  its  equipment.  If  we 
take  a  concrete  example  :  a  man  who  spends 
^looo  on  a  banquet  to  his  friends  consumes 
that  amount  at  once  in  the  pleasure  of  hospi- 
tality or  the  joy  of  ostentation.  If  he  spends 
the  same  amount  on  gewgaws  for  his  wife, 
the  consumption  is  not  immediate,  the  jewels 
are  a  permanent  addition  to  her  armoury  of 
decoration,    and    can    be    turned    into    more 


CAPITAL    AND    PRODUCTION     83 

practically  useful  goods  at  any  time,  if  neces- 
sary. But  if  he  puts  ^1000  into  an  invest- 
ment— a  factory  or  a  railway,  or  a  land  com- 
pany— he  is  increasing  the  productive  power 
of  the  world  by  helping  to  make  and  grow  the 
things  that  mankind  wants,  or  to  carry  them 
from  the  place  they  are  made  to  the  place  at 
which  they  are  wanted.  In  other  words, 
instead  of  spending  his  money  he  has  saved 
it.  and  so  provided  capital  for  the  equipment 
of  industry  ;  for  it  is  only  by  saving  that 
capital  can  be  provided. 

The  responsibility  of  finance  with  regard  to 
capital  is  thus  greater  and  less  than  in  the 
provision  of  currency  and  credit.  Finance 
does  not  manufacture  capital  as  it  does  currency 
and  credit,  and  consequently  its  responsibility 
is  to  that  extent  less  direct.  What  it  does  is 
to  gather  the  savings  of  the  public,  and  provide 
the  public  with  investments  for  the  money  that 
it  saves.  From  this  point  of  view  its  respon- 
sibility is  immense.  As  long  as  it  is  manufac- 
turing currency  and  credit  it  is  dealing,  as  a 
rule,  with  business  experts  who  know  exactly 
what  they  are  doing  when  they  ask  their 
bankers  for  an  overdraft  or  an  acceptance,  and 
are  just  as  well  aware  of  all  the  rules  of  the 
game  as  is  the  banker  or  financier.  But  the 
public,  on  all  subjects  connected  with  money 


84  CAPITAL 

matters,    is    so    abysmally   ignorant    that   its 
monetary    knowledge   may    be   said    to   be   a 
minus  quantity.    A  pamphlet  recently  received 
from  the  United  States  quotes  Mr.  Vanderlip, 
of  the  National  City  Bank  of  New  York,  as 
having  described  the  Americans  as  a  "  nation 
of  economic   illiterates."     If  this   be  true   of 
America  it  is  perhaps  truer  of  England,  and 
indeed   of    all    countries    in    which   economic 
civilization  is  said  to  have  made  any  progress. 
In  this  direction,   in   fact,  progress  cannot  be 
said  to  have  begun,  and  the  ideas  of  the  public 
concerning  the  use  that  it  ought  to  make  of  its 
money,  and  the  kind  of  investments  that  the 
financial  machinery  ought  to  provide  it  with, 
with  a  mouth-filling  rate  of  interest,  a  certainty 
of  capital  appreciation  and  no  risk  whatever, 
are   a   continual   cause   of  great   loss   to   the 
public.     These  ideas  also  produce  a  crop  of 
swindlers  in  the  byways  of  back-street  finance, 
and  a  consequent  oscillation  on  the  part  of  the 
public  between  a  blind  belief  in  its  power  to 
make  a  fortune  without   any  trouble   in   the 
purlieus  of  the  Stock  Exchange,  and  an  equally 
stupid  conviction  that  the  whole  City  is  a  gang 
of  swindlers,  and  that  every  company  promoted 
is  as  likely  as  not  to  be  a  fraud.     As  long  as 
these  hallucinations  are  general   it  cannot  be 
expected  that  the  machinery  by  which  capital 


EDUCATION    NEEDED  85 

is  provided  for  industry  by  the  public  can  work 
smoothly  or  happily.  It  is  said  that  bitter 
experience  is  teaching  the  public  many  impor- 
tant lessons,  but  every  year  there  seems  to 
ome  forward  a  fresh  crop  of  people  nursing 
all  the  old  familiar  fallacies. 

From  one  point  of  view  it  is  certainly  the 
public's  own  fault  if  it  is  fool  enough  to  expect 
impossibilities,  and  consequently,  owing  to  its 
own  greed  and  gullibility,  puts  itself  at  the 
mercy  of  financial  sharks.  The  ultimate 
solution  of  the  problem  lies,  no  doubt,  in  better 
education  of  the  public,  which  will  teach  every 
man  that  the  machinery  of  finance  does  not 
exist  to  enable  him  to  get  rich  quick  by  some 
lucky  stroke  of  fortune,  but  to  provide  him 
with  sound  investments  into  which  he  can  put 
his  money  in  the  expectation  of  a  reasonable 
return  on  it.  In  this  matter,  as  in  all  others, 
the  production  of  a  better  individual  is  the  only 
way  to  the  improvement  of  the  social  average. 
But  at  the  same  time  much  can  be  done  by 
finance  in  purging  its  byways  and  back  streets, 
and  arranging  some  system  of  sign-posts  by 
which  the  investor,  the  real  investor,  if  there 
is  such  a  person,  can  find  his  way  to  what  he 
wants.  Nearly  all  people  who  believe  them- 
selves to  be  investors  are,  as  a  matter  of  fact, 
gamblers,  whose  real  desire  is  to  make  money 

G 


86  CAPITAL 

without  any  trouble.  For  people  of  that  kind 
the  only  medicine  is  the  loss  which  their  own 
failure  to  think  clearly  probably  brings  upon 
them.  But  the  distinction  between  investment 
and  speculation  can  be  made  clearer,  and 
should  be  made  clearer,  and  it  ought  not  to 
be  possible  for  any  investor  who  really  wants 
an  investment  to  take  the  wrong  path  because 
he  is  actually  misled,  and  is  provided  with  a 
speculation  against  his  own  desire. 

The  responsibility  of  finance  with  regard  to 
the  arrangements  by  which  capital  is  collected 
and  invested  is  all  the  greater  in  these  times, 
and  is  likely  to  become  greater  still  during  the 
difficult  period  after  the  war,  because  capital 
has  for  many  years  been  criticized  and  abused 
by  many  well-meaning  people  who  do  not 
quite  know  what  it  means  :  and  during  the 
war  these  attacks  upon  capital  have  been 
growing  in  intensity  and  bitterness,  and  are 
very  likely  to  increase  in  acerbity  and  severity. 
Suspicions  concerning  capital  and  capitalists 
have  been  nourished  during  the  war,  largely 
owing  to  the  slackness  with  which  the  war  has 
been  financed  by  the  Governments  of  the 
various  nations  engaged  in  the  struggle.  If 
this  warwill  go  down  to  history  as  the  greatest 
and  most  momentous  that  ever  has  been 
fought,  it  will  also   be  celebrated  as  the  one 


BAD   WAR  FINANCE  87 

which,  in  spite  of  great  accumulation  of 
financial  experience  of  the  previous  century, 
has  been  the  worst  financed  in  the  history  of 
finance.  It  is  fashionable  to  argue  that  every- 
thing bad  connected  with  the  war  is  the  fault 
of  Germany,  and  I  think  this  is  really  true 
about  the  bad  finance  which  has  marked  its 
course.  Germany  began  the  war  with  the 
belief  that  it  was  going  to  be  paid  for,  as  far 
as  she  was  concerned,  out  of  indemnities 
imposed  upon  the  peoples  whom  she  meant  to 
conquer.  Consequently  for  a  long  time  she 
raised  no  fresh  taxation  whatever,  and  in  fact 
reduced  it,  and  even  when  she  began  to  tax 
she  did  not  attempt  to  raise  enough  by  taxa- 
tion to  cover  even  the  interest  on  the  war 
debt,  to  say  nothing  of  any  contribution  to  the 
actual  cost  of  war.  Consequently  the  other 
Powers,  when  they  dealt  timorously  with  their 
citizens  in  the  matter  of  taxation,  were  able  to 
point  to  the  example  of  Germany,  to  slap 
themselves  on  the  back,  and  to  thank  God 
that  they  were  not  as  any  German  publican. 
England,  which  during  the  first  three  years  of 
the  war  did  much  better  than  any  other  Power 
in  this  respect  to  meet  Avar's  cost  out  of 
taxation,  had  at  the  end  of  the  period  paid 
less  than  25  per  cent,  of  the  war's  cost  out  of 
taxation.      This   compares  with  47  per   cent. 


88  CAPITAL 

in  the  Napoleonic  and  Crimean  wars.  Con- 
sequently three-quarters  of  the  cost  of  the  war 
had  to  be  raised  by  borrowing  or  by  the  manu- 
facture of  currency,  resulting  in  the  process  of 
inflation.  It  was  argued  that  this  course  was 
perfectly  just  and  fair  because  posterity  will 
benefit  from  the  establishment  of  a  "  world 
safe  for  democracy,"  as  President  Wilson  has 
well  expressed  it,  and  that  consequently  pos- 
terity ought  to  pay  a  large  part  of  the  bill. 
This  notion,  that  posterity  can  be  made  to 
pay,  is  largely  a  delusion,  since  posterity  will 
consume  whatever  it  produces  ;  and  by  leaving 
this  enormous  mass  of  debt  outstanding  in 
consequence  of  the  war,  we  can  merely  affect 
the  distribution  of  the  wealth  that  posterity 
creates  and  not  its  amount.  If  a  nation 
borrows  abroad,  then  its  posterity  will  pay  the 
posterity  of  its  foreign  creditors,  but  by  no 
ingenuity  can  we  make  posterity  pay  anything 
to  us. 

In  the  meantime,  however,  the  general 
public  is  possessed  by  another  and  very  natural 
delusion,  which  makes  it  believe  that  the  rich 
are  growing  richer  by  subscribing  to  these 
enormous  war  loans,  and  that  the  great  masses 
of  Government  securities  created  are  an  addi- 
tion to  the  wealth  of  the  investing  classes.  In 
fact,  since  it  is  the  investing  classes  on  whom 


BAD    WAR    FINANCE  89 

the  chief  burden  of  taxation  must  necessarily 
fall,  because  the  imposition  of  heavy  taxation 
on  those  who  are  living  on  the  margin  of 
subsistence  impairs  their  efficiency  as  citizens 
and  so  is  an  economic  mistake,  it  therefore 
follows  that  the  rich,  when  they  subscribe  these 
enormous  sums  to  pay  for  the  war,  are  in  fact 
purchasing  pledges  which  bind  them  to  pay 
themselves  interest  and  to  redeem  the  promises 
to  pay  that  they  will  hold.  If  the  warring 
Governments  had  taken  a  bolder  line,  had  put 
the  facts  of  war  finance  more  clearly  before 
the  investing  public,  the  investing  public  would 
have  seen  that  it  would  have  been  cleaner 
finance,  and  in  their  own  interests  and  those 
of  the  industry  of  the  country,  to  pay  a  much 
larger  proportion  of  the  war's  cost  out  of  taxa- 
tion, and  there  would  have  been  much  less 
friction  and  suspicion  on  the  part  of  what  are 
called  the  working  classes,  who  would  no 
longer  have  believed  that  the  rich  were  grow- 
ing still  richer  out  of  the  war,  while  they 
themselves  were  being  exploited  by  employers, 
swindled  by  profiteers,  and  induced  to  work 
longer  hours  under  extremely  exacting  con- 
ditions for  higher  wages,  the  benefit  of  which 
was  taken  away  from  them  by  higher  prices. 
This  mischief  has  gone  so  far  that  these  cases 
of  suspicion  and  unrest  were  given  prominence 


90  CAPITAL 

by  reports  produced  by  a  Commission  inquiring 
into  industrial  unrest  appointed  towards  the 
end  of  the  third  year  of  the  war,  to  discover 
what  was  wrong  in  England  with  the  feelings 
of  the  working  classes.  The  subjoined  extracts 
are  taken  from  the  Report  of  the  Commissioners 
for  the  South-Western  Area.  One  of  these 
Commissioners  was  Sir  Alfred  Booth,  the 
Chairman  of  the  Cunard  Company,  a  practical 
and  successful  captain  of  industry,  whose 
opinion  cannot  be  thought  to  be  tainted  by 
any  of  the  dogmas  of  the  economic  theorist. 

^"■Increase  in  Food  Prices. — The  one  outstanding 
cause  of  unrest  which  we  found  everywhere  is  the 
high  cost  of  living,  especially  with  regard  to  food. 
This  is  accompanied  by  complaints  of  exploitation, 
profiteering,  and  bad  distribution." 

"  High  Prices  of  Foodstuffs. — The  initial  cause  of 
the  rise  in  prices  was  the  financial  policy  of  the 
Government,  which  has  relied  too  much  on  loans — 
largely  credit  loans — and  too  little  on  taxation 
designed  to  check  unnecessary  consumption.  The 
result  has  been  a  great  inflation  of  credit  followed  by  a 
very  serious  inflation  of  the  currency.  So  long  as  the 
present  financial  policy  is  continued  prices  will  con- 
tinue to  rise.  It  is  admitted  that  income  tax  and 
super  tax  could  not  be  substantially  raised  in  general, 
or  even  more  steeply  graded,  without  a  comprehensive 
reform  with  regard  to  the  treatment  of  family 
incomes.  The  problem  will  in  any  case  have  to  be 
faced  after  the  conclusion  of  peace,  and  it  should  be 


SOLDIER   AND    LENDER         91 

tackled  now  in  order  to  reduce  our  dependence  on 
further  inflation  as  a  means  of  financing  the  war." 

^^Extravagance,  Taxation  and  Forced  Loans. — Our 
attention  was  called  to  the  contrast  between  the  man 
who  is  compelled  to  serve  as  a  soldier  and  the  man  who 
voluntarily  lends  to  the  Government.  It  was  tersely 
put  to  us  that  the  soldier  is  compelled  to  serve  at 
one  shilling  a  day,  while  the  man  with  money  volun- 
tarily lends  to  the  Government  at  5  per  cent.  This,  it 
was  pointed  out,  is  irritating  and  unjust.  Another 
cause  of  irritation  is  the  apparent  luxury  and 
ostentatious  display  of  wealth. 

"  It  is  evident  that  after  an  experience  of  nearly 
three  years  many  persons  will  not  curb  their  ex- 
travagance and  show  of  luxury. 

'*  In  order  to  remove  the  sense  of  irritation  among 
workers  and  to  assist  the  national  exchequer,  all 
unnecessary  expenditure  of  the  individual  ought  to 
be  checked,  and  this  can  only  be  done  by  taxation 
or  by  forced  loans." 

Such  is  the  state  of  mind  on  the  subject  of 
capital  and  the  capitalist  engendered  by  bad 
financing  on  the  part  of  the  warring  Govern- 
ments during  the  course  of  the  war.  What 
sort  of  crop  the  sowing  of  these  economic  tares 
will  produce  later  on  time  will  show.  In  the 
meantime  it  is  the  business  of  finance,  the 
prosperity  and  activity  of  which  is  so  closely 
connected  with  sane  views  on  the  subject  of 
capital,  to  furbish  up  its  armour  in  this  respect 
and  to  be  ready   with    an    answer   when    the 


92  CAPITAL 

enemies  of  capital,  greatly  reinforced  by  what 
has  happened  during  the  war,  range  themselves 
for  frontal  attack  when  it  is  over.  In  other 
words,  we  have  to  be  ready  to  show  how 
capital  earns  its  reward. 

It  has  already  been  shown  that  capital  is 
wealth  set  aside  for  the  production  of  wealth. 
This  is  the  economic  explanation  of  the  matter. 
Somebody  who  by  working  or  otherwise  has 
acquired  wealth,  instead  of  consuming  it  on 
his  own  enjoyment,  puts  it  into  the  equipment 
of  industry.  But  since,  from  the  point  of  view 
of  the  ordinary  man,  capital  is  usually  regarded 
as  money  invested,  and  since  this  is  what 
actually  happens  in  practical  fact,  it  is  perhaps 
better  to  regard  capital  as  so  much  capital 
invested,  thus  carrying  the  economic  analysis  a 
step  further.  Anybody  who  earns  nowadays 
is  paid  in  the  form  of  money  :  he  has  that 
money  in  his  pocket  or  at  his  bank  or  in  a 
drawer  in  his  desk.  He  can  use  it  if  he  pleases 
for  indulgence  in  amusement,  or  he  can  use 
it  as  provision  against  a  rainy  day,  or  for  his 
dependents.  If  he  takes  this  latter  course  he  is 
a  saver  and  consequently  is  likely  to  be  despised 
by  his  fellows,  who  generally  regard  the  man 
who  saves  as  a  certainly  timorous,  and  probably 
mean,  person,  while  the  open-handed  cheerful 
person  who  takes  all  the  risks  of  life  with  a 


SPENDING    AND    SAVING         93 

light  heart  and  spends  all  that  he  gets  with 
open-handed  generosity,  is  universally  regarded 
as  a  much  pleasanter  person  to  meet,  and  a  far 
more  satisfactory  member  of  society.  He  is 
said  to  be  giving  employment,  which  he  certainly 
is — it  is  practically  impossible  to  spend  money 
without  doing  so.  If  he  spends  money  on 
keeping  a  well-equipped  yacht,  he  employs  the 
services  of  those  who  build  the  yacht,  and  dig 
and  transport  the  coal  for  its  propulsion,  and 
the  services  of  the  crew  and  of  all  who  cater 
for  the  expensive  equipment  of  this  attractive 
form  of  pleasure.  But  all  this  employment 
which  he  gives  merely  contributes  to  the  im- 
mediate enjoyment  of  himself  and  his  friends, 
and  does  not  increase  the  productive  power  of 
the  world.  Spending  on  pleasure  and  amuse- 
ment is  surely  an  excellent  thing  to  do  within 
limits.  This  is  no  sermon  on  the  subject  of 
ascetic  self-denial  which  would  leave  all  enjoy- 
ment out  of  the  world.  All  that  I  am  trying 
to  show  is  that  if  everybody  spent  all  their 
money  upon  enjoyment  of  this  kind,  there 
would  be  no  money  available  for  investment, 
consequently  it  would  be  impossible  to  build 
a  new  factory,  lay  out  a  new  railway,  or  break 
a  new  sod  in  unreclaimed  earth.  There  could 
be  no  increase  in  the  demand  for  labour,  and 
the    further    development    of   industry    would 


94  CAPITAL 

stop.  The  service  of  the  mean  and  timorous 
person  who  saves  is  such  that  industry  could 
not  get  on  without  it. 

Capital  has  been  compared  to  the  seed-corn 
used  by  the  farmer.  If  all  the  farmers  con- 
sumed themselves,  or  sold  in  order  to  provide 
themselves  with  other  objects  of  consumption, 
all  the  corn  that  they  grew,  keeping  none  to  be 
sown  for  next  year's  harvest,  there  would  be 
no  corn  grown  next  year.  If  all  those  who 
receive  money,  that  is  to  say  buying  power, 
spent  it  all  upon  luxury  and  enjoyment,  in- 
dustry would  cease  just  as  certainly  as  corn- 
growing  would  cease  if  all  the  corn  were  con- 
sumed. So  that  when  reformers  of  society 
maintain  that  capital  and  the  possession  of 
capital  are  a  device  for  exploiting  the  worker, 
taking  a  share  of  the  product  of  industry  to 
which  they  have  no  claim  in  justice,  the  answer 
is  obvious,  that  if  there  were  no  capital  there 
could  be  no  industry,  and  that  the  man  who 
saves  earns  his  reward  in  the  shape  of  interest 
or  profit  upon  his  investments  by  being  the 
driving  wheel  which  sets  all  the  machinery  of 
industry  to  work. 

Nevertheless,  there  remains  the  difficult 
fact  of  the  hereditary  capitalist :  the  man  who 
has  not  saved  himself,  but  has  inherited  from 
a  father  or  relative  or  friend  a  fortune  which 


HEREDITARY    CAPITAL         95 

may  enable  him  to  exercise  an  enormous 
power  over  the  product  of  industry  without 
ever  having  done  a  stroke  of  work  in  his  life. 
The  unfairness  of  this  arrangement  is  at  once 
evident,  and  there  is  little  need  to  dwell  on  the 
disadvantages  that  it  entails,  not  only  upon  all 
those  whose  industry  is  subject  to  the  charge 
exercised  by  such  a  holder,  but  also  upon  the 
holder  himself,  who  is  much  too  likely  to 
regard  the  world  as  a  place  in  which  he  is 
only  meant  to  enjoy  himself,  with  the  result 
that  he  finds  it  extremely  difficult  to  do  so. 
But  when  all  this  is  admitted,  one  has  also 
to  acknowledge  that  there  is  a  great  deal  of 
justice,  and  still  more  expediency,  on  the  side 
of  the  institution  of  hereditary  property.  If 
we  go  back  to  the  case  of  the  farmer  and  his 
seed-corn,  and  if  we  imagine  that  all  the 
farmers  in  a  community  except  one  were  to 
consume,  directly  or  indirectly,  all  the  corn 
that  they  grew,  the  one  who  had  kept  a  store 
to  be  sown  to  produce  next  year's  harvest 
would,  by  every  law  of  justice,  be  entitled  to 
a  reward  for  his  foresight  expressed  in  the 
price  at  which  he  sold  or  lent  some  of  his  seed- 
corn  to  his  less  provident  brethren.  If  this 
farmer  were  to  die,  leaving  his  seed-corn  to 
his  son,  there  is  much  to  be  said  for  the  con- 
tention that  it  would  be  very  unfair  to  him  that 


96  CAPITAL 

the  son  should  not  benefit  by  his  provident 
action.  And  it  would  be  the  same  thing,  if 
instead  of  leaving  it  to  his  son,  he  left  it  to  a 
nephew  or  a  friend. 

A  man's  power  to  pass  on  the  fruits  of  his 
labour  to  those  whom  he  leaves  behind,  is 
surely  a  very  reasonable  reward.  If  it  is  not 
granted,  as  things  are,  one  of  the  strongest 
inducements  to  work  would  be  taken  away 
from  the  greater  part  of  working  mankind. 
Those  who  own  the  wealth  and  capital  of  the 
world  are  in  the  main  representatives  of  those 
who  by  their  work  and  enterprise  have  made 
industrial  progress  possible  in  the  past.  If  it 
had  not  been  for  the  work  and  enterprise  of 
those  whom  they  represent,  the  world  would 
have  been  a  much  poorer  place,  turning  out 
much  less  stuff  for  the  sustenance  and  enjoy- 
ment of  mankind,  and  consequently  with  a 
much  smaller  population  able  to  enjoy  the 
pleasures  of  existence. 

It  is,  however,  true  that  Governments  have 
to  see  to  it  that  those  who  acquire  this  power 
from  their  own  work  or  from  their  thrifty  and 
hard-working  ancestors  should  not  abuse  it. 
Horrible  results  have  been  produced  in  the 
past  by  the  abuse  of  their  power  by  capitalists. 
Less  than  a  century  ago  it  was  quite  usual 
for  children  of  tender  years  to  be  worked  in 


CAPITAL'S   CRUELTY  97 

factories  and  workshops  under  conditions  which 
now  make  us  shudder  to  read  of  them.  A 
number  of  examples  will  be  found  in  the 
chapter  on  the  employment  of  children  in 
a  book  called  The  Toivn  Labourer^  lately 
published.^     I  quote  from  page  175  : — 

"  It  was  reported  that  there  was  much  more  cruelty 
in  the  Halifax  pits  than  in  those  at  Leeds  and  Brad- 
ford. A  sub-commissioner  met  a  boy  crying  and 
bleeding  from  a  wound  in  the  cheek,  and  his  master 
explained  :  '  that  the  child  was  one  of  the  slow  ones, 
who  would  only  move  when  he  saw  blood,  and  that 
by  throwing  a  piece  of  coal  at  him  for  that  purpose 
he  had  accomplished  his  object,  and  that  he  often 
adopted  the  like  means.'  The  witnesses  examined  by 
a  Factory  Commissioner  at  Worsley  near  Manchester 
in  1833,  said  that  'purring,'  which  was  Lancashire  for 
kicking,  was  a  common  way  of  punishing  boys  and 
girls  in  the  mines  there.  The  Commissioners  of 
1842  found  that  the  coalowners  took  very  little  in- 
terest in  the  children  employed  in  their  mines  after 
their  daily  work  was  over,  and  it  is  certainly  not  diffi- 
cult to  believe  this,  seeing  that  when  Lord  Melbourne 
was  Prime  Minister,  and  delighting  England  by  his 
graceful  friendship  with  the  young  queen,  the  children 
were  working  in  his  mines  from  6  o'clock  in  the 
morning  to  8  o'clock  at  night.  In  Lord  Balcarres's 
pits  at  Aspall  Moor  the  children  worked  from  5  a.m. 
to  6  p.m.,  and  some  of  them  were  workhouse  appren- 
tices.    The  conditions  seemed  scandalous  enough  to 

'  By  J.  L.  Hammond  and  Barbara  Hammond  (Longmans, 
Green  &  Co.). 


98  CAPITAL 

the  Commission  in  1842,  but  in  some  respects,  at  any 
rate,  the  children  were  worse  off  twenty  years  earlier. 
Thus  one  witness  said  that  when  he  began  to  work, 
at  eight  years  old,  as  doorkeeper  in  Felling  Pit  in 
1798,  he  used  to  be  eighteen  or  twenty  hours  down 
the  pit  without  coming  up.  Another  witness,  an 
underviewer,  said  that  thirty-five  years  back  the  boys 
used  to  work  from  2  a.m.  to  8  or  9  p.m.  Another 
witness  described  the  life  of  a  pit-boy  fifty  years 
earlier.  The  boys  began  at  six  to  eight  years  old, 
as  trappers,  and  were  paid  fivepence  a  day.  From 
twelve  or  fourteen  to  seventeen  or  eighteen  they 
worked  as  putters  or  drivers,  being  harnessed  two 
together  to  drag  their  heavy  loads.  Their  hours 
were  from  2  a.m.  to  8  or  10  p.m.  every  day  except 
Saturday.  In  busy  times  they  never  saw  the  day- 
light from  Sunday  to  Saturday  afternoon. 

"The  Commissioners  reported  in  1842,  speaking 
of  the  worst  practices  in  the  West  Riding,  that  the 
proprietors  disclaimed  all  responsibility  and  concern. 
It  is  difficult  to  imagine  that  the  proprietors  any- 
where else  were  more  sensitive.  They  included  men 
of  great  power  and  influence,  men  like  Lord  London- 
derry, Lord  Durham,  Lord  Melbourne,  Lord  Gran- 
ville. These  noblemen  did  not  wash  their  hands  of 
the  business  that  made  their  wealth,  for  they  took  an 
active  part  in  putting  down  strikes  and  crushing 
Trade  Unions.  They  differed  on  many  questions, 
but  on  those  questions  they  were  in  agreement. 
Lord  Melbourne  made  it  pretty  clear  in  1832  that 
he  would  have  liked  to  re-enact  the  old  Combination 
Law,  in  order  to  deal  with  the  Miners'  Unions.  But 
not   one  of  them  seems   ever   to   have   opened   his 


A   CHANGE    OF    VIEW  99 

mouth  on  the  subject  of  the  slave  children  in  their 
mines,  or  supposed  that  they  were  under  the  slightest 
obligations  to  the  society  that  gave  them  their  wealth 
and  power," 


It  seems  astonishing  now  that  such  things 
should  have  happened  in  a  community  which 
believed  itself  to  be  highly  civilized.  The  fact 
that  they  did  happen,  and  that  we  now  regard 
them  as  impossible  is,  from  one  point  of  view, 
a  cheering  evidence  of  the  improvement  in 
human  sentiment  on  the  subject  of  the  treat- 
ment of  labour  that  has  taken  place  since  then. 
It  should,  however,  be  a  perpetual  reminder  to 
us  not  to  be  too  sure  that  the  opinions  which 
we  cherish  now,  and  the  acts  which  public 
opinion  permits,  may  not  seem,  less  than  a 
century  hence,  to  be  just  as  impossible  and 
incredible  to  our  more  enlightened  descendants. 
We  have  no  reason  to  suppose  that  the  dis- 
tinguished gentlemen  who  are  mentioned  in 
the  extract  given  above  as  having  permitted 
things  to  be  done  on  their  property,  and  for 
their  enrichment,  which  we  should  now  regard 
as  barbarous  cruelty,  were  in  fact  one  whit  less 
humane,  sympathetic,  and  large-minded  than 
any  of  us.  They  looked  at  things  from  a 
different    point  of  view,   and   would   probably 


100  CAPITAL 

have  been  horrified  if  it  had  been  suggested  to 
them  that  they  were  doing  anything  inhuman. 
The  reasons  for  this  attitude  of  theirs  and  for 
the  change  which  has  since  come  over  men's 
views  about  these  matters  are  interesting  to 
consider. 

In  the  first  half  of  the  nineteenth  century 
public  opinion  was  strongly  under  the  influence 
of  the  view,  first  put  forward  by  Adam  Smith 
in  his  great  attack  upon  Government  inter- 
ference with  industry,  that  the  obvious  and 
simple  system  of  national  liberty  is  the  one 
thing  by  which  the  interests  of  all  parties  in 
an  industrial  community  are  secured.  It  must 
always  be  remembered  that  Adam  Smith  wrote 
before  the  industrial  revolution  had  taken  place, 
and  from  many  passages  in  his  immortal  work 
it  is  clear  that  his  sympathy  with  the  interests 
of  the  labourers  was  such  that  he  would  have 
been  the  first  to  protest  against  the  extreme 
interpretation  that  was  put  by  his  successors 
upon  his  own  doctrine.  Nevertheless  he  seems 
to  have  held  the  view  that  wages  were  neces- 
sarily always  on  a  level  which  would  barely 
maintain  the  labourer  and  his  family  alive  and 
able  to  work.  This  is  shown  by  the  well-known 
passage  in  which  he  points  out  that  indirect 
taxation  applied  to  necessary  articles  which 
the   labourers   must   consume    are    necessarily 


ECONOMISTS'    ERRORS         loi 

paid   finally  by  their  employers,   because  the 
wages  of  labour  are  inevitably  such   that  the 
labourer  could  not   afford   to  pay  them  him- 
self.    This  pessimistic  doctrine  had  been  still 
further   established  by  the  work   of  Malthus, 
in    which    he    had    demonstrated    to    his   own 
satisfaction  and  that  of  the  public,   which  he 
enormously    impressed,    that    any    increase    in 
the  wages  of  labourers  merely  leads  to  a  more 
rapid  propagation  on  their  part,  which  neces- 
sarily reduces  their  position  again  to  a  place 
on  the  margin  of  starvation.     Thus  misled  by 
their  theoretical  instructors,  it  is  not  surprising 
to    find    the    most    humane    and    enlightened 
employers    convinced  that  any   attempts  that 
they    made   to    better   the   lot    of   those   who 
worked  for  them,  were  certain  to  be  defeated 
by   economic    laws   over  which    they    had    no 
control.     Subsequent   experience   has   proved 
that  these  theories  were  delusions  :   that  it  is 
possible  for  the  wage  earners  to  attain  to  a 
condition  of  life  which  is  well  above  subsistence 
level,  and  that  the  Malthusian  doctrine  is  so 
far  incorrect  that  the  greater  the  control  that 
is  acquired  over  the  necessaries  and  comforts 
of  life,  the  stronger  the  tendency  becomes  not 
to  propagate  up  to  the  margin  of  subsistence, 
but    to    reduce    the    rate    of    increase    in    the 
population. 

H 


102  CAPITAL 

It  was  necessary  to  look  back  over  this 
dingy  period  in  which  economic  delusions  had 
such  disastrous  social  effects,  because  those 
effects  are  with  us  to-day,  and  are  still  part 
of  the  background  of  the  working-class  mind 
which  has  to  be  allowed  for  by  every  one  who 
has  any  control  over,  or  connection  with, 
the  management  of  capital.  The  nineteenth- 
century  delusions  erred  on  one  side  in  favour 
of  optimism,  in  the  belief  that  if  everybody 
was  left  to  seek  his  own  interests  the  best 
interests  of  the  community  would,  by  some 
pleasant  miracle,  somehow  emerge  ;  and  on  the 
other  hand,  went  to  the  extreme  of  pessimism 
by  maintaining  the  view  that  no  efforts  to 
improve  the  lot  of  the  working  classes  could 
possibly  have  any  practical  fesult. 

We  now  know  that  this  optimistic  view 
could  only  have  been  true  in  a  community  in 
which  everybody  was  educated  to  a  very  high 
degree  of  economic  perception,  and  was  also 
gifted  with  an  unusual  range  of  knowledge  and 
discernment  concerning  the  true  meaning  of 
their  own  interests  and  those  of  the  community. 
And  it  has  been  found  necessary  that  the 
Government  should  intervene  constantly  on 
the  side  of  those  who,  being  half-educated 
or  not  educated  at  all,  and  also  having  no 
material    resources    to     fall    back    upon,    are 


STATE    OWNERSHIP  103 

necessarily  the  weaker  parties  in  the  industrial 
bargain.  Given  this  protection  by  the  Govern- 
ment, which  is  necessitated  in  the  economic 
interests  of  the  community,  the  present  system 
of  the  control  of  the  equipment  of  industry  by 
means  of  privately  owned  capital  seems  on  the 
whole  to  be  the  most  workable  system,  in  spite 
of  its  obvious  drawbacks.  The  only  alternative 
to  it  is  the  control  and  ownership  of  the  capital 
by  the  State  or  municipality  or  some  other 
form  of  collective  ownership.  It  is  commonly 
supposed  that  if  this  system  were  established, 
the  wages  at  present  paid  to  capital  would  be 
saved  by  the  community.  This  is  a  complete 
misapprehension ;  capital  would  still  have  to 
be  saved,  and  its  price  would  still  have  to  be 
paid.  The  difference  would  be  that  instead  of 
capital  being  saved  by  certain  members  of  the 
community,  it  would  have  to  be  saved  by  the 
community  as  a  whole,  which  could  only  do 
so  by  either  taxing  the  whole  community  in 
order  to  provide  the  necessary  capital,  or,  if 
it  abandoned  all  monetary  arrangements,  by 
compelling  certain  members  of  the  community 
to  do  the  necessary  work  in  increasing  and 
maintaining  the  equipment  of  industry  which 
is  now  paid  for  by  the  private  capitalist. 
Under  a  coUectivist  system,  just  as  much  as 
under  private  controlled  property  and  capital, 


104  CAPITAL 

fresh  capital  could  only  be  found  if  a  certain 
amount  of  work  were  put,  year-in  and  year- 
out,  into  the  necessary  industrial  equipment. 
And  that  work,  which  represents  the  price  of 
capital,  would  have  to  be  done,  as  now,  by 
somebody.  Certainly  it  would  be  more  equit- 
able on  paper  if  this  charge  for  the  provision 
of  capital  were  distributed  over  the  whole 
community  by  arrangements  made  by  the 
Government  in  the  interests  of  the  whole. 
If  we  could  conceive  an  ideal  Government  at 
work  on  the  job,  knowing  exactly  what  its 
citizens  most  needed  to  produce  for  their 
material  and  mental  welfare,  and  thus  able 
to  induce  them  to  see  that  work  devoted  to 
this  object  is  the  best  thing  to  be  done,  it  is 
possible  to  dream  of  a  State  in  which  very 
rapid  progress  might  be  made  in  the  increase 
of  goods  required,  and  their  distribution  and 
enjoyment. 

But  any  one  who  has  had  anything  to  do 
with  a  Government  Department,  as  they  are 
at  present  constituted,  is  likely  to  agree  that, 
however  great  their  virtues  and  however  acute 
the  abilities  that  they  can  command,  any 
community  which  handed  over  to  them,  and 
to  the  politicians  behind  them  who  continu- 
ally obstruct  their  best  work,  the  entire  control 
of   its    material  welfare,    would  in  a  very  few 


MAKING  THE  BEST  OF  HIM     105 

years  be  more  than  likely  to  find  itself  reduced 
to  a  state  of  extreme  discomfort,  if  not  on  the 
verge  of  starvation.  Some  day  perhaps  we 
may  develop  a  Government  and  people  that 
can  rise  to  the  necessary  economic  pitch  for 
making  the  arrangements  that  would  be  re- 
quired by  the  abolition  of  the  private  capitalist. 
Until  that  day  comes,  we  have  to  use  him  and 
make  the  best  of  him,  not  grudging  him  the 
rate  of  interest  and  profit  he  earns,  but  recog- 
nizing that  without  him  industry  would  be 
impossible,  and  for  this  reason  encouraging 
him  to  produce  and  multiply  as  much  capital 
as  he  possibly  can,  knowing  that  thereby  we 
shall  get  his  capital  at  a  cheaper  rate  than  if 
he  and  it  are  scarce,  and  knowing  also  that  the 
more  capital  we  can  get  out  of  him,  the  greater 
will  be  the  demand  for  labour  on  the  part  of 
those  who  employ  the  capital,  and  the  cheaper 
and  more  plentiful  will  be  the  supply  of  goods 
of  all  kinds  which  they  will  pour  out  for  us 
as  consumers.  Above  all,  it  seems  necessary 
that  those  who  control  the  machinery  of  finance 
should  try  to  educate  the  public  to  a  sounder 
view  of  the  benefit  conferred  upon  the  whole 
community  by  those  who  do  this  dull  and 
unattractive  business  of  saving,  and,  especially 
among  the  working  classes,  that  a  saving 
machinery     should     be    devised    in    order    to 


106  CAPITAL 

encourage  the  labourers  themselves  to  become 
as  far  as  possible  capitalists. 

It  has  been  pointed  out  before  now  that  if 
the  working  classes  would  for  a  few  years  fore- 
go the  use  of  alcoholic  liquors,  they  could  them- 
selves acquire  a  store  of  capital  which  would 
go  a  very  long  way  to  ridding  them  of  depen- 
dence upon  the  capital  supplied  to  them  by 
other  classes.  In  a  speech  at  a  Labour  Con- 
gress held  in  August,  191 7,  a  very  interesting 
statement  was  made  by  Mr.  John  Hill,  its 
President  : — 

"We  have  arrived,"  he  said,  "  at  a  working  agree- 
ment which  aims  at  every  trade  unionist  being  a  co- 
operator  and  every  co-operator  being  a  trade  unionist, 
and  supporting  co-operation  industrially  and  politi- 
cally :  they  to  be  our  bankers  in  time  of  prosperity 
and  our  lenders  in  time  of  adversity." 

This  is  a  process  out  of  which  a  highly 
important  movement  may  arise,  and  anything 
that  can  be  done  by  the  machinery  of  finance 
to  quicken  a  movement  by  which  the  working 
classes  will  themselves  become  capitalists  will 
be  of  the  utmost  importance  to  the  economic 
stability  of  all  countries  in  which  it  is 
developed  and  the  future  material  progress 
of  mankind. 


CHAPTER  V 

COMPANY   CAPITAL 

Capital,  as  we  have  seen,  is  wealth  devoted 
to  production.  The  capital  of  companies  is 
wealth  put  into  companies  by  those  who  sub- 
scribe to  their  capitals  when  they  are  issued. 
It  is  thus  through  companies  and  their  capitals 
that  finance  is  brought  into  very  direct  and 
intimate  relation  with  the  outside  public, 
usually  totally  ignorant  of  its  machinery.  By 
the  institution  of  companies  the  public  becomes 
a  sleeping  partner  in  industry  with  limited 
liability.  The  public  puts  money  that  it  has 
saved  into  the  hands  of  financial  experts  who 
hand  it  over  to  industrial  experts  to  be  in- 
vested in  enterprise  in  the  widest  sense  of  the 
word,  to  earn  a  profit  for  those  who  have  sub- 
scribed the  money.  The  system  is  obviously 
a  development  out  of  private  partnerships,  in 
which  a  certain  number  of  people  used  to  club 
their  capitals  together  to  work  some  enterprise 
for  their  mutual  profit. 

In  the  case  of  a  partnership  it  is  usual  that 


io8  COMPANY  CAPITAL 

the  majority  of  the  partners  at  least  would 
know  something  about  the  business  to  be 
conducted,  and  the  risks  involved  by  the 
enterprise.  In  the  case  of  joint-stock  com- 
panies with  their  capitals  owned  by  an 
enormous  number  of  ignorant  shareholders 
this  can  no  longer  be  the  case,  and  so  the 
problem  that  finance  has  to  face  is  to  provide 
investments  for  the  public  which  will  encourage 
it  to  save  money  for  the  purposes  of  industry, 
and  at  the  same  time  secure  as  far  as  possible 
that  the  money  so  invested  shall  be  well  and 
profitably  used.  The  system  is  obviously  one 
which  carries  with  it  almost  infinite  possibilities 
for  good  or  evil,  for  the  increase  of  the  world's 
wealth  or  for  the  waste  of  its  capital  on  un- 
remunerative  enterprise. 

The  public  whims  on  the  subject  of  the  use 
of  its  money  are  extremely  difficult  to  apply  to 
the  furtherance  of  sound  production.  The 
normal  instinct  of  the  average  man  is  to  spend 
any  money  that  he  gets  without  any  considera- 
tion for  his  own  future,  and  still  less  for  the 
desirability  of  increasing  capital  available  for 
production  in  his  own  country  and  in  the 
world  at  large.  Those  who  do  save  money 
are,  in  many  cases,  almost  irresistibly  attracted 
to  the  brilliant  rather  than  the  sound  form  of 
investment.       What   they   really    want    is    a 


INVESTMENT  &  SPECULATION     109 

speculation  which  will  give  them  a  large  in- 
crease in  the  sum  that  they  have  put  into  the 
venture.  They  see  attractive  prospectuses  and 
circulars  promising  wealth  beyond  the  dreams 
of  avarice,  and  when  these  ventures  do  not 
turn  out  a  success  they  regard  the  whole 
machinery  of  finance  as  a  complicated  swindle, 
which  is  best  left  alone. 

It  is  highly  important  for  the  future 
development  of  industry  that  some  more 
reasonable  frame  of  mind  should  be  developed 
in  the  general  public  on  the  subject  of  money 
and  of  investment,  that  it  should  be  taught 
that  the  man  who  spends  all  that  he  earns  or 
gets  on  his  own  amusement  and  enjoyment 
leaves  the  world  materially  just  as  poor  as  he 
found  it,  and  that  if  we  all  managed  our  money 
affairs  on  these  simple  lines  industrial  progress 
would  be  impossible.  It  is  only  those  who 
have  saved,  and  so  increased  the  equipment 
of  mankind  in  its  power  over  nature  to  pro- 
duce, who  can  feel  that  they  have  helped 
towards  that  great  future  when,  the  material 
wants  of  man  being  easily  supplied,  he  will 
have  some  time  to  look  after  things  that  are 
perhaps  more  important.  Further,  it  has  to 
be  brought  home  to  people  who  do  save 
money  that  short  cuts  to  fortune  in  most  cases 
lead  straight  into  a  morass.     That,  when  they 


no  COMPANY   CAPITAL 

save,  what  they  should  try  to  secure  Is  not 
a  shower  of  plums  from  the  tree  of  fortune, 
but  a  steady,  trustworthy  income  from  their 
investments,  and  that  it  is  their  business  to 
take  an  intelligent  interest  in  their  investments, 
following  with  the  help  of  their  expert  advisers 
the  fortunes  of  the  companies  in  which  they 
are  interested,  and  doing  their  best  to  select 
those  which  are  organized  and  managed  on 
sound  lines. 

It  has  to  be  admitted  that  there  are  enor- 
mous difficulties  in  the  way  of  the  encourage- 
ment of  any  such  reasonable  interest  on  the 
part  of  the  general  public  in  its  investments 
and  monetary  affairs  generally.  The  accounts 
published  by  most  companies  are  very  far  from 
intelligible  to  the  average  citizen.  In  fact  they 
sometimes  seem  to  be  designed  to  convey  as 
little  light  as  possible,  and  any  ordinary  person 
asked  to  sit  down  and  scan  a  company  balance 
sheet  might  be  very  well  excused  if  he  de- 
cided that  it  was  quite  impossible  to  make 
head  or  tail  of  it.  As  an  example,  selected  at 
random,  a  pre-war  balance  sheet  of  Messrs. 
Lipton,  Ltd.,  is  appended.     (See  pp.  112-115.) 

In  one  respect  its  statement  is  a  little  bit 
clearer  than  many  of  those  which  are  issued  by 
similar  companies.  Many  of  them  at  the  top 
of  the  two  divisions,  into  which   the  balance 


INDUSTRIAL  BALANCE  SHEET  in 

sheet  Is  divided,  put  the  mysterious  statements 
"Debtor"  and  "Creditor,"  and  the  investor 
who  is  trying  to  puzzle  his  way  round  the 
meaning  of  the  cryptogram  begins  to  wonder 
why  he  should  be  debited  with  his  capital. 
Lipton,  Ltd.,  do  put  as  a  heading  "  Capital 
and  Liabilities  "  on  one  side  and  *'  Assets  "  on 
the  other.  In  one  sense,  of  course,  the  capital 
of  a  company  is  a  liability,  since  it  represents 
in  most  cases  money  received  from  the  share- 
holders who  ordinarily  subscribe  the  capital, 
and  consequently  money  which  the  company 
has  to  account  for  to  its  shareholders  (which  it 
docs  by  setting  out  on  the  other  side  assets  in 
which  the  money  has  been  invested),  and  to 
pay  back  to  them,  if  it  can,  if  the  company 
should  go  into  liquidation  and  be  wound  up. 

It  will  be  seen  from  the  balance  sheet 
that  Messrs.  Lipton  have  a  total  capital  of 
^2,250,000,  of  which  ;/^i,ooo,ooo  is  in  the 
5  per  cent,  cumulative  preference  shares  (these 
terms  will  be  explained  later)  and  ij  million 
ordinary  of  £1  each.  This  amount  is  the 
capital  of  the  company  in  the  strictest  sense  of 
the  word,  representing  the  money  of  the  pro- 
prietors of  the  concern.  Probably  it  does  not 
all  represent  money  actually  handed  over  at 
the  time  of  the  purchase  of  the  business, 
because  part  of  the  ordinary  shares,  at  least, 


112 


COMPANY   CAPITAL 


LIPTON, 


BALANCE  SHEET  as 


CAPITAL  AND   LIABILITIES. 

Capital — 

Cumulative    5    per  cent.    Preference 
Shares  of;^i  

Ordinary  Shares  of  ,^  I  i 


;^  1, 000, 000    o    o 
1,250,000    o    o 


Debenture  Stock,  4  per  cent 

Bills  Payable         

Overdraft  from  bank 

Sundry  Creditors  and  Directors'  Fees  ... 

Savings  Bank  Deposits  and  Interest  accrued  thereon 

Unclaimed  Dividends      

Interest  on  Debenture  Stock  accrued  at  Date  ... 

Premium  on  Shares  Account      ;^220,888  17 

Reserve  Account 145,000    o 

Profit  and  Loss  Account — 

Balance      brought      from 
previous  year ;i3')702    8    6 

Profit    for     year     ending 

14th  March,  1914       ...    160,286    5     5 


Deduct — 

(a)  Interest  on  Debenture 

Stock  for  year  ...  ;£'20,000    o     o 

{h)  Interim  Dividend  on 
Preference  Shares  paid 
30  Septembei,  1913         25,000    o    o 

{<■)  Interim  Dividend  on 
Ordinary  Shares  paid 
iQlh  November,  1913      37,500    o    o 


191,988  13  II 


82, 500    o    o 


;^2, 250,000  o 
500,000  o 
297,636  13 
159,727  2 
207,295  12 
161,951  o 
3,026  4 
8,974 


5  " 


365,888  17    3 


109,488  13  11 
^^4,063,988    9  10 


AN  INDUSTRIAL  BALANCE  SHEET    113 
Limited. 

at  14th  MARCH,   1914. 


ASSETS. 

Goodwill  of  the  Business,  Freehold  and 
Leasehold  Properties,  and  Freehold  Estates 
in  Ceylon. 

Amount  per  Balance 
Sheet  at  I5ih  March, 
1913,  at  Cost,  less 
amounts  written  off 
for  Depreciation  ...  ;^l, 847,824   ii     i 

Additional  Capital 
Expenditure  during 
year  10,115     6     7 


Less  written  off  for 
Depreciation  and 
Lease  Redemption 
during  year     

Plant,  Machinery,  Fixtures,  Fittings,  Utensih, 
Carts,  Horses,  etc. 
Amount  per   Balance 

Sheet       at        15th 

March,  1913        ...  /"SSS.SOi     7     8 
Additions  during  year 

at  Branches  ...  8,403     3     9 

Additions  during  year 

at  Stores,  Factories, 

etc 13.813  14 


;Ci,857,939  17    8 


4,978  18    4 


;^i,852,96o  19    4 


I.ess  written  off  for  Depreciation  during 
year      


/:58o,7i8    5    8 
88,222  13    3 


Stocks-in-Tradc,  per  certified  Inventories         

Sundry  Debtors       

Insurances  unexpired  and  nther  items  paid  in  advance 
Investments  at  Cost  and  interest,  etc.,  accrued  thereon  (Market 

value,  2^91,713  3x.  la/.)        

Savings    Hank    Investments   at    Cost,   and    interest    accrued 

thereon  (Market  Value,  ;^30,66l  OJ.  cx/.) 

Cash  at  Bank  and  on  h.ind  


562,495  12  5 

1,084,337  16  4 

329,630     I  4 

19,569  II  t 


99,892  15     1 


32.772    7 
82,329    6 


/;4,o63,988    9     K 


114  COMPANY   CAPITAL 

Dr.  PROFIT   AND   LOSS   ACCOUNT 

To  Expenses  of  Management,  including  Salaries,  General 
Charges,  Head  Office  Expenses,  Auditors'  Fees,  Transfer 
Office  Expenses,  Savings  Bank  Expenses,  Advertising  and 
Law  Costs        ;f  121,489  13    9 

To  Bad  Debts         3,746  19  10 

To  Interest  on  Savings  Bank  Deposits   ...  ^^5,612     7     5 

Z«j  Interest  on  Savings  Bank  Investments  I1217  15     7 


4,394  II   10 


To  Depreciation  on  Plant,  Fittings,  Fixtures,   Utensils,  etc., 
at  Stores,  Head  Office,  and  Branches,  and  in  Ceylon  ;  also 

Provision  for  Depreciation  of  Leaseholds 23,201  il  7 

To  Directors' Fees             1,200  o  o 

To  Fees  to  Trustees  for  Debenture  Holders       630  o  o 

To  Balance  carried  to  Balance  Sheet,  being  Profit  for  year    ...  160,286  5  5 

/■3i4,949  2  5 


PROFIT   AND   LOSS 


115 


for  Year  ending-  14th  March,  1914. 


Cr. 


By  Profit  on  Trading  at  Stores  and  Branches  (after  deducting 
Wages  and  Working  Expenses)  and  Profits  from  Estates 
in  Ceylon         

By  Transfer  Fees 

By  Interest,  etc.,  on  Investments  


/:3i2,534  10    8 

403  19    o 

4,010  12    9 


;^3 14,949    2    5 


AUDITORS'   REPORT. 


We  report  that  we  have  obtained  all  the  information  and  explanations  we 
have  required  as  Auditors. 

We  have  examined  and  compared  the  foregoing  Balance  Sheet  and  Profit  and 
Loss  Account  with  the  Books  and  Vouchers  kept  in  London  and  the  Returns 
received  from  Ceylon,  Calcutta,  Bombay  and  Sydney,  and  find  they  are  prepared 
in  accordance  therewith ;  and,  subject  to  the  question  of  depreciation  which  is 
dealt  with  in  the  Directors'  Report,  in  our  opinion  the  Balance  Sheet  is  properly 
drawn  up  so  as  to  exhibit  a  true  and  correct  view  of  the  state  of  the  Company's 
affairs  according  to  the  be^t  of  our  information  and  the  explanations  given  to  us, 
and  as  shown  by  the  Books  of  the  Company. 

London,  25//;  Juntr,  191 4. 


)i6  COMPANY   CAPITAL 

may  probably  have  been  taken  by  the  sellers 
of  the  business  when  they  turned  it  into  a 
joint-stock  company,  and  invited  the  public  to 
take  shares  in  it.  But  as  it  stands  this  repre- 
sents the  interests  of  the  proprietors,  who 
share  in  varying  degree  in  the  profits  earned 
by  it,  and  in  the  distribution  of  the  assets  in 
the  event  of  winding  up. 

There  is  also  a  liability  in  the  shape  of 
debenture  stock  bearing  4  per  cent,  interest. 
Debenture  stocks,  or  mortgage  bonds  as  is  the 
more  usual  form  in  America,  are  sometimes 
spoken  of  as  the  capital  of  the  company; 
but  they  are,  in  fact,  not  capital  but  debts. 
The  interest  upon  them  has  to  be  paid  before 
the  owners  of  the  capital  receive  anything  by 
way  of  dividend,  and  in  the  case  of  winding  up 
they  rank  first. 

It  is  very  important  that  the  public,  in 
makinof  investments,  should  bear  in  mind  this 
difference  between  becoming  creditors  of  a 
company  by  buying  its  debenture  stocks  or 
mortgage  bonds,  and  taking  the  more  specula- 
tive risk  of  becoming  a  partner  in  the  enterprise 
by  holding  preference  or  ordinary  shares.  The 
other  large  items  on  the  liability  side  of  the 
balance  sheet  are  bills  payable  for  nearly 
;i^300,ooo,  and  an  overdraft  from  the  bank  for 
;^  1 60,000,  sundry  creditors  for  ^207,000,  and 


INDUSTRIAL  BALANCE  SHEET    117 

savings  bank  deposits  and    interests    accrued 
thereon  for  ;^  162,000.     These  items  may  be 
put   together  as   representing  what   is   called 
floating   debt,  and  they  represent   a   total  of 
;^8 20,000,  against  which  on  the  other  side  of 
the  account  we  see  sundry  debtors  ^330,000, 
and  investments  and   items   paid  in  advance 
^120,000.      There    are    also    total    reserves 
among  the  liabilities  amounting  to  ^366,000, 
of  which  ;^  1 45,000   has   apparently  been  re- 
served out  of  the  profits,  and  ^221,000  has 
been  provided  by  the  issue  of  shares  from  time 
to  time  at  a  premium,  that  is  to  say,  by  their 
sale  to  the  public  at  a  higher  price  than  the 
£1  each  for  which  they  stand  as  a  liability. 
These  total  reserves  of  ^^366,000  are  thus  in 
a  sense  the  property  of  the  shareholders  just 
as  much   as  the  capital  that  they  have  sub- 
scribed.    They  have  been  produced  either  by 
profits  earned  in  the  course  of  the  business  or 
by  sales   of  shares,  owing  to  the   company's 
good    credit,    at    a    premium.      This    reserve 
account  should  thus  be  added  to  the  capital 
of  the  company  in  considering  what  its  position 
really  is  if  it  went  into  liquidation.     It  is  not 
money  that  has  definitely  to  be  paid  to  credi- 
tors, but   it   is,  like  the  capital,  money  which 
has  to  be  accounted  for  to  shareholders,  and 
made  good  to  them  if  the  assets  on  the  other 

I 


ii8  COMPANY   CAPITAL 

side  of  the  balance  sheet  can  be  sold  to  produce 
the  prices  put  against  them. 

The  other  items  on  the  liabilities  side 
represent  the  sums  which  have  to  be  accounted 
for  from  profit  and  loss  account,  that  is  to  say, 
the  net  earnings  of  the  company  represented 
by  the  amount  brought  forward  from  the 
previous  year,  the  amount  of  profit  for  the 
year  under  review,  less  sums  paid  out  for  in- 
terest on  debenture  stock  and  interim  divi- 
dends on  preference  and  ordinary  shares.  We 
thus  find  out  of  the  total  of  over  ^4,000,000, 
to  which  both  sides  of  the  balance  sheet  add 
up,  about  ^2,700,000  are  represented  by 
claims  on  the  part  of  shareholders,  and  a 
balance  in  the  shape  of  debenture  stock,  bills 
payable,  overdraft,  creditors,  savings  bank 
deposits,  etc., — definite  claims  which  creditors 
would  enforce  in  case  of  liquidation  before  the 
shareholders  received  anything.  It  should  be 
added  that  the  item  of  savings  bank  deposits 
and  interest  accrued  thereon  is  unusual  in 
a  commercial  balance  sheet  of  this  kind. 
Messrs.  Lipton  have  seen  fit  to  add  to  the 
facilities  given  to  their  customers  the  provision 
of  a  savings  bank  as  well  as  tea  and  groceries. 
It  is  perhaps  a  somewhat  questionable  policy 
for  a  commercial  company  of  this  kind  to  em- 
bark in  unless  the   savings   bank   business  is 


INDUSTRIAL  BALANCE  SHEET     119 

kept  absolutely  separate  from  the  other 
activities  of  the  enterprise,  and  the  money 
received  from  savings  bank  depositors  is  re- 
presented by  investments  specially  made  on 
their  behalf.  In  fact,  we  see  among  the  assets 
an  item  of  ^30,000  odd  of  savings  bank  invest- 
ments. These  investments  are  presumably 
of  the  kind  which  could  be  easily  sold,  so  that 
any  sudden  rush  of  withdrawals  could  be  met 
out  of  them. 

There  are  thus  two  clearly  distinct  forms 
of  liabilities  of  a  commercial  company  or  of 
any  other  company.  There  is  the  definite 
sum  due  to  creditors  or  on  bills  payable,  or  on 
overdraft  from  bank  which  have  to  be  met 
unless  the  company  admits  itself  insolvent ; 
and  there  is  the  rather  more  hazy  item  of 
Shareholders*  Money  in  the  form  of  capital 
and  reserve  funds  accumulated,  which  the 
company  has  to  make  good  if  it  can. 

Now,  when  we  look  at  the  other  side  of 
the  balance  sheet,  we  cgme  to  a  really  interest- 
ing question,  because  the  value  of  most  of  the 
assets  in  most  companies  is,  to  a  certain  ex- 
tent, elusive.  The  first  asset  we  find  is  the 
Goodwill  of  the  business,  Freehold  and  Lease- 
hold Properties  and  Leasehold  Estates.  The 
value  set  against  this  item  is  arrived  at  by 
taking    the    amount    in    the    previous   balance 


120  COMPANY   CAPITAL 

sheet  which,  we  are  told,  was  the  amount  at 
Cost,  less  amounts  written  off  for  Depreciation. 
There  is  then  added  additional  capital  ex- 
penditure during  the  year,  and  the  amount 
written  off  for  Depreciation  and  Lease  Re- 
demption during  the  year  is  deducted,  and  so 
we  arrive  at  the  big  total  of  ^1,853,000  ;  and 
the  question  which  every  shareholder  would 
like  to  know,  if  he  tries  to  study  the  balance 
sheet  with  anything  like  intelligent  interest  is, 
whether  these  assets  in  which  his  money  has 
been  invested  would,  if  they  had  to  be  realized, 
produce  more  or  less  than  the  sum  at  which 
they  stand  in  the  balance  sheet  ?  This  is  the 
point  on  which  nobody  can  be  sure  because 
nobody  knows  the  value  of  any  asset,  with  the 
exception  of  Cash  in  Hand  and  a  few  really 
marketable  securities  which  can  be  depended 
upon  to  produce  their  price  if  sold,  until  the 
value  of  the  asset  is  tested  by  an  attempt  to 
sell  it.  The  value  of  the  thing  being  what  it 
will  fetch,  one  can  never  be  quite  sure  of  its 
value  until  one  actually  tries  to  see  what  some- 
body will  give  for  it. 

The  goodwill  of  the  business  is  a  thing 
which  always  puzzles  those  who  are  not 
used  to  this  mysterious  term.  It  means 
practically  the  value  of  the  connection  and  the 
selling    power   of  the   business    when    it    was 


GOODWILL  121 

bought,  and  it  is  an  item  so  difficult  to  calculate, 
that  very  widely  differing  rules  have  been 
suggested  for  arriving  at  it.  One  of  these 
rules,  for  instance,  says  that  three  years' 
purchase  of  the  profits  of  the  business  is 
enough  to  give  for  goodwill  of  any  commercial 
concern  under  the  sun.  This  is  too  hard  a 
saying  in  some  cases,  but  one  thing  is  certain, 
that  goodwill  is  not  an  item  that  one  likes  to 
see  flourisning  at  large  in  any  balance  sheet. 
The  best  financed  companies,  such  as  banks 
and  insurance  companies,  write  the  goodwill 
off  out  of  the  profits  as  fast  as  they  can,  when- 
ever they  acquire  an  existing  business,  and 
pay  for  it  anything  over  the  actual  old  iron 
value  of  the  assets.  It  is  still  more  objection- 
able to  see  the  goodwill  of  the  business,  as  in 
this  case,  not  separately  valued  in  the  balance 
sheet  but  mixed  up  with  Freehold  and  Lease- 
hold Properties  so  that  the  shareholder,  in 
trying  to  arrive  at  a  solution  of  the  problem  of 
the  real  value  of  the  assets,  does  not  even 
know  how  they  are  classified,  how  much,  for 
example,  of  this  ;!^  1,853,000  represented  by 
the  first  item  among  the  assets  is  goodwill  and 
how  much  is  freehold  and  leasehold  properties 
and  estates. 

This    question   is    a    very    important   one, 
because,    if   anything    went    wrong    with    the 


122  COMPANY   CAPITAL 

company  and  it  found  itself  obliged  to  turn 
its  assets  into  cash,  its  goodwill  would,  from 
the  nature  of  the  case,  be  reduced  in  value  by 
the  fact  that  it  had  fallen  on  evil  days  ;  where- 
as freehold  properties  and  estates  might  easily 
escape  the  contagion  of  the  company's  mis- 
fortunes if  they  were  well  placed.  All  that  you 
can  be  sure  about  this  first  asset  is,  that  it 
represents  what  certain  properties  and  the 
connection  and  selling  power  of  Messrs. 
Lipton  were  sold  at  to  the  public  when  the 
company  was  formed  plus  subsequent  ad- 
ditional capital  expenditure,  less  the  amounts 
written  off  since  the  company  has  been  in 
existence  for  depreciation.  Whether  these 
amounts,  so  invested,  were  well  invested  at 
the  beginning,  whether  the  assets  purchased 
have  increased  or  decreased  in  value  since  they 
were  bought,  whether  sufficient  allowance  has 
been  made  for  depreciation  of  these  assets 
which,  such  as  leasehold  properties,  are  neces- 
sarily declining  in  value, — all  these  are  things 
as  to  which  the  average  shareholder  can 
supply  no  light  whatever. 

It  is  the  same  thing  with  the  next  item 
among  the  assets,  Plant,  Machinery,  Fixtures, 
Fittings,  Utensils,  Carts,  Horses,  etc.  It  is 
the  same  thing,  only  much  more  so,  because 
all  these  items  are  things  which  are  obviously 


DEPRECIATION  123 

wearing  out  with  more  or  less  rapidity,  and 
any  attempt  on  the  part  of  a  shareholder  to 
guess  whether  the  price  originally  given  for 
them  was  right,  whether  a  sufficient  amount 
has  been  written  off  for  depreciation  since 
they  were  bought,  and  how  they  would  fare  if 
they  had  to  be  sold  in  course  of  liquidation, 
would  only  land  him  in  a  maze  of  bewilder- 
ment. They  will  know,  when  they  read  the 
Auditor's  Report,  that,  subject  to  the  question 
of  depreciation  which  is  dealt  with  in  the 
Directors'  Report,  the  Auditors  consider  that 
the  balance  sheet  is  properly  drawn  up,  etc., 
according  to  their  formula ;  and  they  will  see, 
if  they  look  at  the  Directors'  Report,  that, 
having  spent  during  the  year  ;^23,979  on  Re- 
pairs and  Renewals,  the  Directors  are  of 
opinion  that  the  amount  of  ^23,202  which 
they  have  allowed  for  Depreciation  is  suffi- 
cient. The  shareholder's  confidence  in  the 
directors  of  the  company  will  doubtless  assure 
him  that  the  Directors  would  not  form  their 
opinion  without  very  good  reason  ;  but,  con- 
sidering what  human  fallibility  inevitably  is, 
there  is  still  a  certain  mistiness  about  the 
value  of  over  half  a  million  assigned  to  this 
item  in  the  balance. 

Then  we  come  to  Stocks-in-Trade,  per  cer- 
tified Inventories,  of  over  one  million.    This  is 


124  COMPANY   CAPITAL 

the  stock  of  goods  which  Messrs.  Lipton  hope 
to  be  able  to  sell  to  their  customers  at  a  profit 
and,  under  ordinary  circumstances,  would  no 
doubt  succeed  in  doing  so.  But  here,  again, 
there  is  always  the  possibility  of  a  fall  in  prices 
which  might  upset  the  value  put  upon  this 
item  in  the  balance  sheet ;  and  then  we  come 
to  sundry  debtors  ;!^3 30,000,  as  to  whom  the 
shareholders  can  only  hope  that  these  debtors 
are  good  and  will  duly  pay  what  they  owe  to 
the  company. 

With  regard  to  the  other  items  there  is  less 
element  of  uncertainty.  Insurance  expenses 
and  other  items  paid  in  advance  are  a  definite 
fact  about  which  there  can  be  no  doubt.  In- 
vestments at  cost  and  interest  accrued  thereon 
stand  in  the  balance  sheet  just  under  ;^  100,000, 
and  a  note  in  brackets  tells  us  that  the  market 
value  of  them  is  less  than  ;^92,ooo.  The 
savings  bank  investments  at  cost  and  the 
interest  accrued  thereon  standing  at  nearly 
;!^33, 000  are  again  stated  in  a  note  in  brackets 
to  have  a  market  value  of  under  ^31,000.  So 
that  with  regard  to  these  two  items,  to  which 
the  more  or  less  trustworthy  test  of  market 
value  can  be  applied,  we  find  that  their  market 
value  is  considerably  below  the  value  given  in 
the  balance  sheet. 

Finally  we  come  to  cash  at   bank   and  on 


VALUE   AND   VERACITY       125 

hand,  concerning  which  there  is  no  doubt. 
There  it  is,  ;/^8  2,000  odd.  These  doubts 
which  any  shareholder  scanning  any  balance 
sheet  is  justified  in  feeling  about  what  might 
happen  if  the  assets,  which  he  sees  priced  at 
such  and  such  a  figure,  had  to  be  sold  in  order 
to  return  his  capital,  apply  with  more  or  less 
strength  in  the  case  of  nearly  all  balance  sheets 
which  anybody  can  contemplate.  The  nearest 
approach  to  certainty  can  be  got  in  the  case 
of  investment  companies  whose  assets  consist 
entirely  of  marketable  securities  with  a  free 
market  and  a  trustworthy  quotation.  Any 
balance  sheet  which  contains  freehold  pro- 
perty, buildings,  plant,  machinery,  utensils, 
equipment,  horses,  carts,  and  a  big  block  of 
stock-in-trade,  whatever  it  may  be,  may  always 
involve  a  certain  amount  of  guess-work.  All 
that  the  public  can  do  is  to  try  to  repose  con- 
fidence in  the  right  people,  and  to  believe  that 
the  directors  of  the  companies  with  whom  it 
places  its  money  make  the  most  earnest  en- 
deavours always  to  keep  the  balance  sheet 
with  the  closest  possible  relation  to  veracity ; 
but  then  the  public's  power  to  distinguish 
between  the  amount  of  confidence  to  be  re- 
posed in  one  Board  of  Directors  and  another 
is  almost  nil.  The  best  kind  of  directors 
are   the   men   who   are,   or    have    been,    hard 


126  COMPANY   CAPITAL 

at  work  in  some  sort  of  business  similar  to 
the  kind  which  is  done  by  the  company,  and 
are  the  least  known  to  the  general  public.  We 
still  seem  to  be  a  long  way  off  the  very  neces- 
sary amount  of  knowledge  which  ought  to  be 
secured  to  every  shareholder  before  indulging 
in  an  investment,  and  until  this  knowledge  can 
somehow  be  granted  it  is  hardly  reasonable  to 
expect  that  industrial  investments  will  be  really 
popular. 

It  is  not  wonderful  that  the  average  share- 
holder, when  faced  by  a  Company  balance 
sheet,  should  give  up  the  task  in  despair  of 
trying  to  unravel  its  mysteries,  and  should 
usually  test  the  value  of  a  security  by  some 
quite  irrelevant  consideration,  such  as  the  fact 
that  it  owns  a  shop  at  the  corner  of  his  street, 
or  by  its  paying  a  good  dividend,  or  because 
he  has  heard  from  a  friend  who  has  a  relative 
in  its  employment  that  it  is  a  very  good  thing 
to  have  money  in.  Sometimes  he  is  guided 
in  his  choice  of  investments  by  the  names  of 
the  directors ;  but  in  England  this  method  of 
guessing  the  value  of  the  security  is  somewhat 
out  of  fashion.  British  snobbery  used,  at  one 
time,  to  have  a  preference  for  companies 
whose  Boards  were  decorated  with  the  names 
of  peers,  and  some  years  ago  a  case  was  fought 
in  the  English  Courts  in  which  a  gentleman 


ORNAMENTAL   DIRECTORS     127 

brought  a  claim  ap^ainst  a  company  promoter 
for  five   hundred   guineas,  which  was  the   fee 
alleged    to    have   been    promised   to   him    for 
securing  a  certain   Earl  to  sit  on  the   Board, 
His  claim  was  found  to  be  a  good  one  and  he 
got   his  money,  the  judge  remarking  that   it 
was  queer  kind  of  traffic,  but  the  arrangement 
appeared    to    be    entirely    business-like,    the 
claimant  had  carried  out  his  promise  and  was 
entitled  to  his  money.     Experience,  however, 
has   taught  the   British   public   that    it   is    not 
always  a  trustworthy  method  of  assessing  the 
prospects   of  a   company    and,    as   a   balance 
sheet  is  usually  beyond  their  comprehension, 
their   methods    in  investment  are  usually   re- 
duced   to   haphazard    guess-work,    except    in 
those  fortunate  cases  when  they  get  hold  of  a 
first-rate  stockbroker  and  trust  him  and  follow 
his    advice.      In    the    present    state    of    the 
economic  education  of  the  public  perhaps  this 
is  the  best  system  that  can  be  devised,  but  it  is 
urgently  desirable  that   those   responsible   for 
the    machinery    of    finance    should    do    their 
utmost    to    encourage    a    healthy    intelligence 
among  all   classes  of  people  as  to  the  duties 
of   the    investor   and   the   common-sense  with 
which  he  should  fulfil  them.     It  pays  finance 
that  there  should  be  as  little  bad  and  rotten 
finance  in   existence    as    possible.     To  secure 


128  COMPANY  CAPITAL 

this  end  it  is  necessary,  in  the  first  place,  to 
try  to  teach  the  pubHc  what  investment  means. 
Mr.  Vanderlip,  as  already  quoted,  has  lately 
said  that  the  Americans  are  a  nation  of 
economic  illiterates.  The  pamphlet,  in  which 
I  saw  this  remark  of  Mr.  Vanderlip's,  wanted  to 
know  what  Mr.  Vanderlip  and  other  American 
bankers  had  been  doing  to  correct  this  state  of 
things.  Whether  it  is  fair  to  impose  this  duty 
of  teaching  the  public  upon  financiers  is  an 
open  question,  but  there  can  be  no  doubt  that 
it  would  pay  them  very  handsomely  to  do  so. 
Any  measure  that  would  increase  the  know- 
ledge that  the  public  has  concerning  the  bene- 
fits conferred  upon  the  community  and  upon 
mankind  at  large  by  those  who  save  money 
and  invest  it  well,  would  be  an  enormous  gain  to 
those  who  handle  the  machinery  of  finance  and 
wish  to  see  finance  purged  of  the  evil,  crawling 
things  that  creep  about  the  dark  places  in  its 
hinterland,  but  this  is  a  long  process  and  would 
take  many  years  to  compass.  In  the  mean 
time  something  at  least  can  be  done  to  secure 
greater  clearness  in  balance  sheets  and  a  higher 
ideal  of  good  finance  among  those  responsible 
"or  the  investment  of  the  public's  money.  A 
balance  sheet  taken  by  itself  throws  very  dim 
light  on  the  position  of  the  company  that 
publishes  it.     It  is  a  fairly  common  practice  in 


WAR  AND  BALANCE  SHEETS     129 

America  to  give  on  every  balance  sheet  the 
corresponding  figures  of  the  previous  one,  and 
there  seems  to  be  no  reason  why  this  system 
should  not  be  made  universal.  It  should  also 
be  recognized  that  a  balance  sheet  is  not  really 
designed  to  conceal  the  position  of  the  com- 
pany, but  to  make  it  as  clear  as  possible,  and 
for  this  end  the  fullest  detail  is  desirable,  and 
the  system  by  which,  as  is  shown  in  the  example 
given  above,  an  item  like  good-will  is  lumped 
together  with  freehold  and  leasehold  properties, 
should  be  discouraged.  Unfortunately  in  the 
course  of  the  war  there  has  been  some  retro- 
gression among  English  companies.  It  is 
cynically  suggested  that  this  process  has  been 
encouraged  by  the  imposition  of  the  Excess 
Profits  Tax  which  has  made  companies  eager 
to  give  as  little  as  possible  information  con- 
cerning their  position.  There  is  probably 
very  little  truth  in  this  suggestion,  because  the 
Inland  Revenue  authorities  are  hardly  likely 
to  be  guided  much  by  the  inspection  of  the 
published  balance  sheet  in  the  case  of  any 
companies  concerning  whose  earning  power 
they  have  reason  to  wish  for  fuller  information  ; 
but  it  is  not  a  good  sign  to  see  two  at  least  of 
tlie  great  English  steamship  companies  making 
their  balance  sheet  into  a  farce  by  having  one 
item  only  on  its  asset  side  in  which  their  whole 


I30  COMPANY  CAPITAL 

property  is  lumped  together  in  one  preposterous 
jumble. 

But  when  all  this  is  said,  the  fact  remains 
that  for  years  to  come  the  general  public  will 
be  worse  than  ignorant  on  the  subject  of 
investment,  and  since  it  is  above  all  necessary 
for  the  material  progress  of  mankind  that  the 
investor  should  be  protected  against  his  own 
folly  and  stupidity,  and  should  be  encouraged 
to  save  money  and  invest  it  by  the  knowledge 
that  he  can  do  so  with  the  greatest  possible 
confidence,  financiers  should  try  to  devise  some 
means  to  this  end.  Hitherto  the  highest  class 
of  financiers  have,  at  any  rate  in  England, 
confined  their  operations  chiefly  to  public 
securities,  such  as  Government  and  Municipal 
Loans,  and  to  issues  made  by  great  railways, 
and  occasionally,  and  rather  as  a  concession, 
to  the  securities  of  very  first-rate  industrial 
companies.  Consequently  it  has  been  left  to 
a  horde  of  second  and  third-rate  company 
promoters  to  deal  with  the  very  important 
question  of  the  promotion  of  the  ordinary  in- 
dustrial company,  in  the  preparation  of  its 
prospectus  and  the  market  in  its  securities. 
And  mining  shares,  in  which  gambling  pos- 
sibilities and  the  uncertainties  of  what  may 
happen  underground  have  added  to  the 
inevitably  doubtful  elements  that  are  associated 


AN    URGENT    NEED  131 

with  so  many  investments,  have  been  left  very 
largely   in  the  hands   of  people   who    frankly 
invited  the  public  to  a  gaming  table  in  which 
the  odds  are  largely  in  favour  of  the  bank.     It 
is   a    question    whether  the  really   high-class 
financial  leaders  have  not  made  a  mistake  in 
adopting  this  rather  exclusive  attitude.     Any 
losses  that  are  made  owing  to  dishonest  com- 
pany   promoting    and    mining    swindles    are 
debited  by  an  unreasonable  public  to  the  City 
as  a  whole,  though  the  City  is  probably  a  place 
in  which  there  is  a  generally  higher  level  of 
honesty    than    in    most    other    circles    of  the 
community.      As  compared  to  the  haunts    of 
the  politicians  and  lawyers  it  shines    "like  a 
good  deed  in  a  naughty  world."     It  is  difficult 
to  see  how  the  purging  process  can  be  brought 
about,  but  there  is  no  more  urgent  need.     It 
might  perhaps  be  done  by  some  extension  of 
the  system  adopted  in  England  of  what  is  called 
Trust  Companies.     These  companies  make   it 
a  business  to  invest  the  capital  that  they  receive 
from     their     shareholders    in    the     securities 
of    other    companies,  thus    enabling    each    of 
their  shareholders  to  spread  his  risk  by  each 
holding  a  part  of  the  capital  of  the  company, 
which,  in  its  turn,  holds  a  large  and  diversified 
amount   of   securities.      The  system    has    not 
been  without  its  critics.     One  cynic  remarked 


132  COMPANY   CAPITAL 

concerning  it  that  a  Trust  Company  was  a  con- 
cern which  enabled  people  to  hold  collectively 
a  mass  of  securities  not  one  of  which  they  would 
touch  individually.  Nevertheless  it  has  been 
on  the  whole  fairly  successful ;  and  it  might  be 
possible  for  the  leaders  of  finance,  by  under- 
taking through  this  means,  modified  for  the 
purpose,  the  business  of  investing  the  money 
of  the  public  for  it,  to  devise  a  machinery  by 
which  investors  should  be  certain  that  by 
acquiring  securities  in  Trust  Companies  with 
certain  names  on  the  Board  they  would  be 
putting  their  money  collectively  into  securities 
which  had  at  any  rate  been  selected  by  experts 
after  due  consideration  of  their  merits. 


CHAPTER  VI 

THE    MANUFACTURE    AND    MARKETING    OF 
SECURITIES 

Companies  and  the  securities  which  represent 
claims  on  their  property  and  profits  come  into 
being  by  the  issue  of  a  prospectus.  As  every- 
body knows,  Joint  Stock  Companies  are  formed 
either  because  somebody  has  a  notion  for  an 
enterprise  and  not  enough  capital  of  his  own 
to  work  it,  and  consequently  appeals  to  the 
general  public  to  put  funds  into  it  on  the  ex- 
pectation of  profits  to  be  earned,  or  because 
the  owners  of  an  existing  business  wish,  for 
various  reasons,  to  turn  it  wholly  or  partly  into 
cash  by  inviting  the  public  to  subscribe  for  its 
capital.  Or  sometimes  again  because  owners 
of  an  existing  enterprise  wish  to  increase  the 
amount  of  capital  at  their  command  and  think 
that  they  can  do  so  most  cheaply  and  simply 
by  turning  it  into  a  Joint  Stock  concern  and 
so  getting  money  from  the  public  with  which 
to    increase    its    scope.     Whichever   of    these 

K 


134  MARKETING  OF  SECURITIES 

causes  be  the  origin  of  the  company,  an  appeal 
to  the  public  through  a  prospectus  is  the  usual 
course  for  supplying  the  capital. 

On   this  subject  of  prospectuses    and  the 
regulations  and  restrictions  under  which  they 
should  be  drawn  up,  there  has  been  in  the  past 
much  controversy,  and   there   is  likely  to  be 
more  in  the  future  when,  after  the  war,  appeals 
for  industrial  capital  once  more  become  pos- 
sible.    On  this  question,  as  on  so  many  others, 
there  are  two  main  schools  of  thought,  one  of 
which    advises   as  much   freedom  as  possible 
for  those  who  invite  subscriptions    from   the 
public  for  new  securities  and  in  the  terms  in 
which  they  appeal  to  it,  and  the  other  is  in 
favour  of  strict  regulation  and  control  either 
by  the  Government  or  by  the  authorities  of 
the  Stock  Exchange  with  a  view  to  protecting 
the  public   against   its   own   ignorance.     The 
question  is  an  extremely  difficult  one  on  the 
face    of    it.      In    individualistic    nations    like 
America    and     England     the    attractions    of 
freedom    seem    to    weigh    down    the    balance. 
The  old   legal    doctrine   caveat  emptor^  signi- 
fying that  anybody  who  makes  a  bad  purchase 
has  only  got  his  own  stupidity  to  thank,  is  a 
nice  simple  rule  which  saves  everybody  a  great 
deal  of  trouble  and  throws  upon  the  indivi- 
dual the   responsibility  for   looking  after   his 


FREEDOM  V.  CONTROL         135 

money.  It  would  be  an  ideal  principle  to 
work  upon  if  everybody  were  even  reasonably 
educated  on  the  subject  of  money  matters. 
As  it  is,  the  full  and  logical  application  of  this 
principle  leaves  so  many  doors  open  to  fraud 
and  swindling  for  which  the  ignorance  and 
stupidity  of  the  public  are  ultimately  respon- 
sible, that  good  finance  is  besmirched  by  the 
wrong-doing  of  its  unsavoury  hangers-on. 

It  is  very  like  the  old  theory  that  there 
should  be  absolute  freedom  of  contract  between 
man  and  man,  and  that  anything  like  Govern- 
ment interference  in  such  matters  as  wages 
or  factory  conditions  was  an  unwarrantable 
hampering  of  individual  freedom  which  could 
only  do  harm  in  the  long  run.  Here  again 
the  principle  would  have  been  absolutely  sound 
if  the  people  to  whom  it  was  applied  had  been 
fitted  by  education  and  other  circumstances 
to  be  treated  on  this  ideal  basis ;  but  when  it 
was  a  question  of  complete  freedom  of  con- 
tract between,  on  the  one  side,  a  set  of  em- 
ployers who  had  wealth  and  knowledge  behind 
them  and  could  afford  to  wait  and  keep  their 
works  shut  up  if  they  thought  it  suited  their 
interests  to  do  so  ;  and,  on  the  other,  a  set 
of  workmen  with  no  resources  to  fall  back 
upon,  no  education  that  could  tell  them  what 
other  chances    there   were  of  employment  in 


136  MARKETING  OF  SECURITIES 

other  lines  of  life,  and  nothing  but  starvation 
ahead  of  them  if  they  were,  for  any  length  of 
time,  out  of  work,  the  application  was  so 
obviously  unfair  that  the  Government  has  had 
to  interfere  more  and  more  with  the  working 
out  of  the  principle  of  freedom. 

In  money  matters  it  is  very  much  the  same 
thing.  We  have,  on  the  one  side,  a  public 
which  understands  little  or  nothing  about  the 
machinery  of  investment,  and  is  impelled  by 
many  of  the  most  obvious  qualities  of  the 
human  mind,  such  as  its  improvidence,  its 
desire  to  back  its  luck  and  its  eagerness  to 
acquire  wealth  without  trouble,  to  make  bad 
mistakes  whenever  it  approaches  practical 
questions  of  finance.  It  is  easy  to  answer 
that  the  public  has  only  to  choose  a  good 
stockbroker  or  a  good  financial  adviser,  put 
confidence  in  him  and  follow  him  and  all  will 
be  well  with  it.  This  is  perfectly  true,  but  how 
is  the  public  to  know  who  is  a  good  stock- 
broker or  who  is  a  good  financial  adviser  ? 
There  seems  to  be  no  way  round  the  difficulty 
except  the  terribly  slow  one  of  the  gradual 
education  of  the  public  to  a  state  of  more 
common  sense  about  money  matters  and  more 
intelligent  interest  in  what  happens  to  its 
money,  so  that  it  may  give  at  least  as  much 
attention  to  investing  its  savings  as  it  does  to 


FREEDOM   :'.   CONTROL         137 

buying  its  clothes  or  its  cigars,  and,  at  the  same 
time,  the  working  of  the  process  by  which 
somehow  or  other  the  best  elements  of  finance 
shall  be  able  to  exercise  a  ofreater  control  over 
the  worst  ones,  whose  misdoings,  at  present, 
are  continually  bringing  the  whole  machinery 
into  disrepute.  In  the  meantime  can  anything 
be  done  by  stricter  Government  regulation  in 
regard  to  the  preparation  of  prospectuses  and 
the  formation  of  companies  ? 

In  Germany,  the  land  where  freedom  gets 
short  shrift,  and  finance,  like  most  other  de- 
partments in  life,  is  controlled  and  ordered 
about  by  a  sergeant-major  of  a  Government, 
it  cannot  be  claimed  that  the  regulations  and 
control  imposed  have  eliminated  the  swindler 
from  German  life.  Experience  in  England  of 
Government  control  during  the  war  in  matters 
of  new  issues  and  of  finance  in  general,  is  not 
likely  to  cause  any  general  hankering  for  its 
continuance  a  moment  longer  than  is  warranted 
by  the  war's  interests.  Delays  and  red  tape 
have,  as  seems  to  be  inevitable  with  Govern- 
ment regulations,  strewn  the  path  of  Treasury 
control  over  new  issues  of  securities  with 
blasphemous  criticism. 

Finance,  however,  can,  I  think,  do  some- 
thing on  its  own  account  to  try  to  improve 
the  standard  of  prospectuses  and  the  methods 


o 


8  MARKETING  OF  SECURITIES 


of    company    promotion,    pending    the    long- 
delayed   date  when    the   public    may  perhaps 
have  learnt  some  sense   for  itself.     It  is  not 
well    that    small    companies   with    speculative 
possibilities    and    small    capitals,    which    lend 
themselves  so  easily  to  Stock  Exchange  mani- 
pulation, should  be  left  in  the  hands  of  third- 
rate  company  promoters.     The  great  ones  of 
the  earth  in  finance  must  see  that  the  system 
by  which  they  restricted  their  operations   to 
Government  and  municipal  loans,  railway  issues, 
and  a  few  very  select  industrials,  has  not  been 
good  for  them  or  for  the  public.     Those  are 
democratic  days  and  it  is  above  all  desirable  that 
capital  should  be  made  as  democratic  as  pos- 
sible.    What  we  want  to  secure  is  to  see  that 
every  member  of  the  community,  who  has  any 
control  over  money,  shall  see  that  saving  it  is 
not  an  act  of  skinflint  meanness,  but  one  that 
confers  benefit  on  the  community  and  furthers 
the  economic  progress  of  mankind,  and  that 
his  savings,  however  small,  shall  be  well  taken 
care  of  on  his  account,  and  that  he  shall  not  be 
induced  by  misrepresentations  and  deceptions 
to  throw  his  money  down  a  sink  and  conse- 
quently to  be  convinced  that  it  would  have 
paid  him  much  better  to  have  spent  it  on  his 
own  amusement. 

Every    good    industrial    prospectus    that 


CLEARNESS   AND  CANDOUR     139 

appears  makes  all  the  bad  ones  look  worse. 
What  we  want  is  that  there  shall  be  as  many 
good  ones  as  possible  so  that  the  bad  points  of 
the  bad  ones  may  be  made  more  glaringly 
apparent.  The  good  points  of  a  prospectus, 
as  of  a  balance  sheet  or  any  other  financial 
statement,  consist,  as  one  need  hardly  say,  of 
clearness,  candour,  and  fullness.  Any  one  who 
picks  one  up  ought  to  be  able  to  see  from  its 
perusal  exactly  what  the  company  is  buying, 
exactly  what  it  is  paying  for  it,  exactly  what 
has  been  paid  for  it  by  any  vendors  who  have 
passed  it  on  from  one  to  the  other,  say,  during 
the  previous  two  years,  exactly  what  its  pre- 
vious earnings  have  been  year  by  year  and  not 
over  an  average,  and  exactly  what  arrange- 
ments have  been  made  with  regard  to  the 
placing  of  the  capital  by  underwriting  or  other- 
wise, that  is  to  say  how  much  is  being  paid  to 
anybody  who  may  be  undertaking  to  take  over 
the  securities  issued  if  the  public  fails  to  do  so. 
It  is  a  fairly  modest  claim  to  urge,  that  the 
public  should  be  told  this  much  before  it  is 
asked  to  put  money  into  a  company  that  is 
appealing  for  subscriptions,  but  a  very  large 
number  of  prospectuses  that  used  to  appear  in 
the  past  would  not  have  come  up  to  this  com- 
paratively modest  ideal. 

When  we  come  to  the  forms  of  securities 


I40  MARKETING  OF  SECURITIES 

they  may,  as  a  general  rule,  be  roughly  divided 
into  three.  There  are,  first  of  all,  the  securi- 
ties which  embody  not  proprietorship  or  part- 
nership in  any  company  or  concern,  but 
creditorship,  involving,  sometimes  more  and 
sometimes  less,  the  right  to  wind  the  company 
up  and  to  foreclose  on  its  property  in  case  the 
interest  due  is  not  paid  to  date.  In  this  cate- 
gory would  also  be  included  the  debts,  bonds 
or  obligations,  whatever  they  are  called,  of 
Governments,  municipalities,  and  public  bodies, 
the  great  advantage  of  which  lies  in  the  fact 
that  their  security  does  not  depend  on  the 
earning  power  of  any  particular  enterprise  or 
company,  but  on  the  taxable  capacity  either  of 
the  nation  or  the  State  or  of  a  town  or  of  a 
country  district  which  has  been  made  respon- 
sible for  the  due  payment  of  the  interest  and 
repayment  of  the  debt  by  its  legally  empowered 
authorities. 

It  is  in  this  class  of  securities  that  the  real 
investor  finds  what  he  wants,  if  indeed  he  can 
be  really  said  to  exist.  The  real  investor, 
though  the  line  between  investment  and  specu- 
lation is  a  very  difficult  one  to  draw,  is,  in  my 
opinion,  one  who  puts  money  into  securities, 
not  with  any  view  to  an  increase  either  in  the 
income  from  them  or  in  the  capital  value  of 
them,  but  simply  in  the  hope  of  a  secure  and 


THE    REAL    INVESTOR         141 

exact  interest  upon  them  with  the  certainty  of 
repayment  some  day  at  due  date  if  the  security 
be  made  so  definitely  repayable.  A  real  in- 
vestor, as  long  as  his  interest  was  secure,  would 
never  bother  to  look  in  the  papers  to  see 
whether  his  securities  had  gone  up  or  down  a 
quarter,  and  it  would  not  occur  to  him  to  jump 
in  and  out  of  them  on  the  chance  of  increasing 
by  a  few  pounds  the  capital  that  he  invested. 

As  a  matter  of  fact,  very  few  of  us  find 
ourselves  able  to  cultivate  this  philosophical 
detachment  on  the  subject  of  investments. 
Most  of  us  feel  pleased  if  our  securities  go  up 
in  price,  and  are  tempted  to  sell  them  and  to 
put  the  money  into  something  cheaper  and 
repeat  the  operation.  We  ought,  of  course,  to 
know  that  if  our  securities  have  gone  up,  and 
if  their  security  has  been  at  all  times  unim- 
peachable, they  have  not  gone  up  for  any 
reason  affecting  it,  but  merely  because  the  de- 
mand for  first-rate  investments  has  been  greater 
than  the  supply,  and  that  consequently  all 
equally  good  securities  will  have,  roughly  and 
more  or  less,  risen  together.  It  will,  there- 
fore, not  be  possible  to  take  advantage  of  the 
rise  by  acquiring  any  other  security  that  has 
lagged  behind,  and  that  what  we  shall  really  be 
doing  if  we  effect  an  exchange,  will  be  to  buy 
something  that    is   not    fiuitf   ^.o   well   secured 


142  MARKETING  OF  SECURITIES 

and  cross  the  boundary  line  into  speculation 
by  buying  in  the  hope  of  a  rise. 

Other  forms  of  securities  are  those  which, 
more  or  less,  imply  proprietorship  of  a  com- 
pany instead  of  the  more  privileged  position 
of  a  creditor.  If  you  buy  preferred  or  pre- 
ference, or  common  or  ordinary  stocks  and 
shares  you  become  a  proprietor.  If  you  hold 
preference  or  preferred  securities  you  will  find 
yourself  entitled  to  a  fixed  rate  of  dividend 
which  may,  or  may  not,  be  cumulative,  that  is 
to  say  that  if,  in  one  year,  the  company  is 
unable  to  meet  it,  the  arrears  will  have  to  be 
met  before  the  ordinary  stockholders  receive 
any  dividend.  It  is  also  usual  for  the  prefer- 
ence holders  to  be  given  priority  in  the  event 
of  liquidation.  That  is  to  say,  if  the  company 
is  wound  up  and  its  assets,  after  meeting  all 
due  debts,  do  not  leave  enough  to  pay  off  in 
full  the  preference  and  the  ordinary  holders, 
the  preference  holders  have  a  right  to  the 
return  of  their  capital  before  the  ordinary  get 
anything. 

Since  preference  holders,  then,  have  priority 
in  income  and  in  return  of  capital,  it  is  usual 
for  their  income  and  for  their  claim  for  return 
of  capital  to  be  limited  to  a  fixed  rate  in  one 
case  and  to  the  face  value  of  the  security  in 
he  other.     Sometimes,  however,  they  receive 


PREFERENCE    SECURITIES     143 

the  right  to  participate  both  in  income  and 
assets  after  the  ordinary  have  received  a  fixed 
amount ;  but,  in  any  case,  the  preference  holder 
is  on  a  different  footing  from  the  creditor, 
because  he,  by  becoming  a  proprietor,  has 
thrown  in  his  lot  with  the  company  and  shares 
in  its  fortunes  within  specified  limits. 

Many  people,  consequently,  have  a  holy 
horror  for  preference  and  preferred  securities, 
arguing  that  if  the  company  does  well  they 
get  no  more  than  their  fixed  rate  of  dividend, 
whereas  if  the  company  does  ill  their  prefer- 
ence right  is  almost  certain  to  be  evaded  by 
the  threat  of  compulsory  liquidation  with  pos- 
sibly disastrous  results,  that  debts  ranking 
ahead  of  them  can,  at  any  time,  be  created, 
and  that  consequently  they  are  neither  an  in- 
vestment nor  a  speculation,  but  a  miserable 
compromise  with  the  advantages  of  neither. 
It  cannot  be  denied  that  there  is  some  truth  in 
these  contentions.  It  seems  to  be  more  reason- 
able to  make  up  one's  mind  exactly  whether 
one  does  want  an  investment  or  a  speculation 
— if  only  one  could  be  really  honest  with  one- 
self on  the  point — and  having  made  up  one's 
mind,  to  go  for  one  or  the  other  instead  of 
compromising  on  an  amphibious  hybrid. 

In  ordinary  stocks  and  shares  the  specu- 
lative element  is  inevitable,  that  is   to   say,  if 


144  MARKETING  OF  SECURITIES 

the  security  is  really  ordinary,  and  it  is  en- 
titled to  take  all  the  profits  left  over  and  above 
for  division,  after  meeting  interest  on  debt  and 
dividends  on  preference  shares,  and,  in  the 
case  of  liquidation,  to  take  whatever  is  left  of 
the  capital  assets  after  debts  and  preference 
holders  have  been  satisfied.  But  it  sometimes 
happens  that  a  share  which  is  called  ordinary 
is  entitled  to  a  cumulative  rate  of  interest,  and 
one  finds  that  there  is  a  deferred  share  or  a 
management  share  or  a  founder's  share  or 
some  other  kind  of  security  which  takes  the 
final  bite  off  the  profits  of  the  concern. 

Sometimes,  often  in  fact,  these  founders' 
or  management  shares  only  rank  for  dividends 
after  the  ordinary  has  received  a  certain 
amount,  and  they  divide  the  balance  of  profit, 
either  taking  one-half  of  it  or  some  other 
agreed  portion.  The  existence  of  this  kind  of 
security  is  often  criticized  as  bad  finance,  and 
as  likely  to  lead  to  directors  and  managers, 
in  whose  hands  these  securities  generally  stand, 
dividing  too  much  of  the  profits  of  the  busi- 
ness, so  that  the  income  from  their  founders' 
or  management  shares  may  be  satisfactorily 
increased.  It  seems  to  me  that  there  is  not 
very  much  in  this  criticism,  though  there  may 
have  been  cases  in  which  rascally  Boards  may, 
by  paying  too   high  dividends,   have  put  too 


MISLEADING    LABELS  145 

high  a  value  on  their  founders'  shares,  and 
then  passed  them  on  to  some  ignorant  person 
who  did  not  understand  the  game.  But  this 
kind  of  rascality,  when  it  is  on  the  warpath, 
can  find  plenty  of  opportunities  quite  apart 
from  the  existence  of  founders'  shares,  and 
there  have,  in  fact,  been  many  excellently 
managed  and  financed  companies  in  which 
Founders'  shares  have  been  prominent  in  the 
picture. 

With  regard  to  this  question  of  the  denomi- 
nation of  shares  and  securities,  the  only  sug- 
gestion that  need  be  made  is  that  companies 
might  be  obliged,  either  by  law  or  by  the  regu- 
lations of  the  Stock  Exchange,  not  to  apply 
labels  to  securities  that  are  in  any  way  mis- 
leading, as,  for  instance,  when  a  security  is 
called  a  prior  lien  or  a  first  mortgage,  when  its 
actual  qualities  do  not  entitle  it  to  any  such 
respectful  designation. 

When  we  come  to  the  question  of  the 
market  in  securities,  and  the  rules  and  regu- 
lations, if  any,  which  might  secure  the  elimina- 
tion of  securities  in  which  it  is  not  good  for 
the  public  to  deal,  we  are  faced  again  with  the 
same  problem  as  in  the  case  of  regulation  and 
control  of  prospectuses  and  company  pro- 
motion. If  control  is  secured,  there  is  an  end 
of   that    freeflom   and   elasticity    which    is    the 


146  MARKETING  OF  SECURITIES 

basis  of  the  best  qualities  of  the  Anglo-Saxon 
race,  and  has  been  the  foundation  of  the  enor- 
mous wealth  and  prosperity  that  it  has  built 
up  on  both  sides  of  the  Atlantic  and  all  over 
the  world. 

If  we  do  not  control  at  all,  we  leave  the 
greed  and  ignorance  of  the  public  face  to  face 
with  a  horde  of  sharks  who  are  only  anxious 
to  prey  on  it  and  do  so  with  chronic  and 
continuous  success.  This  is  the  rough  cure 
by  which  the  economic  Providence  tries  to 
teach  mankind  not  to  be  a  fool  about  its 
money.  But  when  we  leave  the  disease  to 
be  handled  by  this  drastic  but  very  slow  work- 
ing treatment,  we  allow  things  to  happen  which 
cause  misgiving  and  misapprehension  in  the 
eyes  of  a  critical  public — when  it  is  seen  that 
shady  company  promoters  and  people  who 
make  a  living  by  preying  on  the  gullibility  of 
the  public  found  county  families  and  hand  on 
to  their  offspring  a  substantial  claim  for  all 
time  on  the  productive  power  of  humanity. 
People  naturally  begin  to  wonder  whether  a 
financial  system  which  permits  these  things  is 
really  admirable,  and  whether  it  would  not  be 
better  to  hand  over  the  whole  business  of 
wealth  producing  and  consumption  to  the 
State. 

To   any   one   who   believes    in   individual 


GOVERNMENT    CONTROL      147 

freedom  and  individual  initiative  as  the  real 
basis  of  energy,  progress,  and  morality,  and 
everything  else  that  counts,  the  growth  of 
such  a  view  seems  to  be  disaster ;  but,  just  as 
democracy  is  on  its  trial  in  the  war,  indi- 
vidualism, and  with  it  the  institution  of  private 
property,  will  perhaps  be  still  more  severely 
on  their  trial  when  the  war  is  over  and  our 
financial  system,  which  is  so  closely  allied  with 
both,  will  have  to  do  its  very  best  to  purge 
away  any  blemishes  which  could  be  used  as  a 
brick-bat  by  the  critical. 

In  most  Continental  countries  the  closest 
watch  is  kept  by  Government  over  the  admis- 
sion of  securities  to  quotation  on  the  Bourse. 
As  is  well  known,  this  weapon  has,  in  the 
past,  been  effectively  used  by  Governments  in 
order  to  obtain  diplomatic  and  fiscal  conces- 
sions. In  France,  for  example,  if  there  were 
any  question  of  a  quotation  being  granted  to 
a  loan,  say  of  a  South  American  Republic,  the 
authorities,  before  giving  the  requisite  per- 
mission, would  be  likely,  in  the  first  place,  to 
stipulate  that  at  least  a  proportion  of  the 
money  raised  by  the  loan  should  be  spent  in 
France,  and  would  very  likely  take  the  oppor- 
tunity to  make  representations  concerning  any 
tariff  imposed  upon  French  wines  or  other 
goods. 


148  MARKETING  OF  SECURITIES 

In  England  before  the  war  the  Government 
had  no  control  whatever  upon  the  action  of 
the  Stock  Exchange  Committee  In  granting  or 
withholding  quotations  to  securities.  It  was 
often  urged  that  either  the  Government  or  the 
Committee  should  make  the  same  stipulations 
as  Continental  Governments  when  foreigners 
came  to  us  asking  for  a  market  for  their 
securities ;  and  that  it  should  be  a  condition 
that  any  money  subscribed  to  loans  in  England 
should  be  spent,  at  least  in  part,  in  this 
country,  so  giving  employment  to  British  in- 
dustry. In  fact,  the  absence  of  any  such  re- 
striction often  brought  financial  business  to 
London  which  it  would  otherwise  have  missed, 
and  it  came  to  us  because  the  borrowers  did 
not  care  to  submit  to  the  stipulations  im- 
posed in  Paris  or  elsewhere.  Moreover,  it 
seems  to  me,  that  the  effectiveness  of  these 
stipulations  is  a  delusion.  They  are  not  really 
necessary  at  all.  Any  country  that  borrows 
from  another  must  necessarily  stimulate  the 
export  trade,  in  the  widest  sense  of  the  word, 
of  the  lender,  unless  it  makes  use  of  the  loan 
merely  to  repay  previous  indebtedness  or  to 
meet  interest  which  it  would  otherwise  be 
unable  to  provide,  or  takes  away  the  proceeds 
in  gold.  We  know,  as  a  matter  of  fact,  that 
this  latter   means  of   payment  of  the   money 


GOVERNMENT   CONTROL       149 

that  was  lent  by  English  financiers  was  hardly 
ever  employed ;  consequently,  although  it  did 
not  follow  that  the  borrowing  country  actually 
spent  the  money  that  it  borrowed  in  England, 
its  action  in  borrowing  here  meant  that 
English  industry  had  to  make  an  export  of 
some  kind,  somewhither,  because  the  loan 
that  had  been  made  by  the  financiers  gave 
somebody  a  claim  over  English  goods  and 
services  which  could  only  be  met  by  their 
export. 

If  it  is  desirable  that  stricter  regulations 
should  be  made  concerning  the  kind  of  security 
that  is  allowed  to  be  quoted  on  the  Stock 
Exchange,  it  certainly  seems  to  be  desirable 
that  the  responsibility  in  this  matter  should  be 
in  the  hands,  not  of  the  Government  or  of  any 
official  authority,  but  in  those  of  the  Stock 
Exchange,  working  in  the  interest  of  finance 
and  all  its  customers. 

When  once  official  interference  is  intro- 
duced, in  the  first  place  you  get  red  tape  and 
all  kinds  of  official  delays,  absurd  restrictions, 
and  a  multitude  of  incomprehensible  forms  to 
be  filled  up.  These  are  mere  puddles  in  the 
road  of  progress,  wiiich  can  be  stepped  over 
by  those  who  are  used  to  them  ;  but  a  much 
more  serious  objection  lies  in  the  fact  that 
when    once    the    Government    exercises    the 


I50  MARKETING  OF  SECURITIES 

power  of  refusing  the  right  to  issue  securities 
or  to  quote  them  and  deal  with  them  on  the 
Stock  Exchange,  the  public  inevitably  jumps 
to  the  conclusion,  in  spite  of  the  most  explicit 
and  carefully  worded  disclaimers  to  the  con- 
trary on  the  part  of  the  Government,  that  any 
issue  which  is  authorised  to  be  brought  out, 
quoted,  and  dealt  in,  has  been  hall-marked  by 
the  Government. 

I  came  across  a  very  pleasant  practical 
example  of  this  curious  tendency  in  the  course 
of  19 1 6,  when  an  extremely  unfortunate  com- 
pany was  authorized  to  make  an  issue  by  the 
British  Treasury,  and  I  was  told,  not  by  a 
member  of  the  ignorant  and  financially  un- 
reasonable public,  but  by  a  very  careful  and 
clever  Scotsman  and  banker,  that  he  had  sub- 
scribed for  a  large  number  of  shares  because 
the  fact  that  it  had  received  Treasury  sanction 
showed  that  it  must  be  a  good  thing.  If  this 
is  the  impression  conveyed  upon  the  mind  of  a 
highly  trained  financial  expert,  it  is  obvious 
that  the  guileless  Clerk  in  Holy  Orders  with  a 
large  family  and  a  craving  for  high  dividends 
is  still  more  likely  to  be  misled  into  the  delusion 
that  what  the  Treasury  allows  it  virtually 
guarantees. 

And  this  argument,  though  not  so  strong 
in  the  eyes  of  the  general  public  if  such  regu- 


FOR  AND  AGAINST  FREEDOM    151 

lation  is  exercised  by  a  Stock  Exchange  Com- 
mittee as  if  it  is  performed  by  the  Government, 
nevertheless  remains  a  thing  to  be  carefully 
considered.  If  once  a  Stock  Exchansfe  in- 
dulges  in  more  than  merely  formal  examination 
of  the  companies  and  securities  that  it  is  asked 
to  admit  to  dealings  within  its  walls,  it  begins 
to  accept  responsibility  before  the  public,  which 
is  certain  to  be  much  greater  in  the  mind  of 
the  public  than  it  can  possibly  be  in  the  view 
of  the  Committee  or  other  ruling  body. 

Freedom  has  made  London  the  world-wide 
market  for  securities  of  all  kinds.     It  has  also 
made  possible   much  swindling,  large  loss  to 
the  public,  and  many  gains  to  the  light-fingered 
camp-followers   of  the   financial   army.      The 
question    is,    whether    finance    can    deal   with 
these  camp-followers,  whose  depredations  on 
the  public  are   continually  ascribed   to   it,  and 
that    not  without   some  justification,    because 
they  work  through  the  abuse  of  the  forms  of 
the  best  finance.     The  old-fashioned  idea  that 
if  the  public  is  fool  enough  to  come  into  the 
market  and  deal   in  any  gold  bricks  that  are 
manufactured    for    its     edification,     then    the 
public  has  only  to  thank   itself  for  its  losses, 
is  absolutely  sound  as  a  matter  of  ethical  and 
economic  theory,  but  it  produces  results  which 
do   harm,    and    if   Imance   can    see    a    way    of 


152  MARKETING  OF  SECURITIES 

modifying  it  and  giving  the  public  a  certain 
amount  of  protection  without  too  much  sacrifice 
of  freedom,  something  will  have  been  done  to 
make  the  future  of  finance  cleaner,  more  com- 
fortable, and  more  profitable  for  the  honest 
people  who  work  it  squarely,  and  less  profit- 
able for  the  noisome  insects  that  lurk  in  the 
chinks  of  the  fabric. 

Then  as  to  speculation  and  time  bargains. 
Some  moralists  tell  us  that  it  would  be  much 
better  for  the  public  if  all  speculation  by  means 
of  time  bargains  was  controlled  out  of  ex- 
istence. In  other  words,  that  the  system  by 
which  a  man  can  buy  securities  which  he  does 
not  mean  to  pay  for,  or  sell  securities  that  he 
does  not  mean  to  deliver,  in  the  hope  of  closing 
the  bargain  a  week  hence,  or  a  month  hence, 
or  a  year  hence  at  a  profit,  should  be  done 
away  with. 

In  the  first  place,  even  if  this  were  done, 
you  would  not  stop  speculation  in  the  sense  in 
which  I  am  using  the  word  :  that  is  to  say, 
the  purchase  of  securities  not  with  a  view  to 
getting  a  steady  revenue  from  them,  but  with  the 
hope  of  a  rise  in  price.  It  would  merely  mean 
that  the  speculator,  instead  of  buying  looo 
rubber  shares  in  what  is  called  the  "  Sixpenny 
Bazaar,"  trusting  to  being  able  to  carry  them 
over  in  the  market  until  he  either  is  able  to  take 


IS  SPECULATION   NAUGHTY?    153 

a  profit  or  is  compelled  by  disgust  to  cut  a  loss, 
would  buy  a  much  smaller  quantity  and  pay 
for  them.  His  risk  of  loss  would  be  much  the 
same.  The  moral  obliquity  of  the  transaction, 
if  any,  has  no  relation  with  its  arithmetic,  so 
that  such  an  attempt  to  control  speculation 
would  fail  in  its  object  of  preventing  people 
from  losing  money  and  from  being  naughty. 

Moreover,  is  speculation  naughty  ?  It  is  a 
very  stupid  way  of  losing  one's  money,  because 
the  odds  are  evidently  against  the  amateur  in 
gambling  in  a  market  wh-ich  is  always  likely  to 
be  ringed  and  controlled  by  professionals,  who 
know  every  move  in  the  game,  and  have  access 
to  early  information,  and  means  of  manufactur- 
ing and  putting  it  about  if  there  is  none  to  be 
got.  Nevertheless,  backing  one's  luck  is  a 
thing  which  has  to  be  done  continually  through 
life.  Life  itself  is  largely  a  gamble  against 
incalculable  forces.  The  desire  to  gamble  is 
almost  universal,  and,  within  reasonable  limits, 
higitimate.  The  more  it  is  repressed  and 
frowned  on  by  respectability  the  more  the 
public's  craving  for  it  will  be  provided  for 
by  unscrupulous  touts  and  the  financial  equiva- 
lents of  street-corner  bookmakers.  Specula- 
tion, moreover,  carries  with  it  the  distinct 
economic  advantage  that  it  makes  a  market 
freer  and  steadies  the  level  of  prices.     Those 


154  MARKETING  OF  SECURITIES 

securities  are  most  easily,  quickly,  and  cheaply 
dealt  in,  in  which  a  speculative  account  is  open 
and  consequently  a  big  business  is  being  trans- 
acted. In  the  long  run  and  on  the  average 
the  speculator  loses  money.  By  doing  so  he 
provides  facilities  for  investors  and  gives  steadi- 
ness to  markets. 


CHAPTER   VII 

INTERNATIONAL    CURRENCY 

So  far  we  have  considered  these  problems 
of  finance  chiefly  from  the  point  of  view  of 
their  workinsf  and  effect  at  home.  When  we 
come  to  look  at  them  from  an  international 
point  of  view  they  become  more  difficult,  more 
complicated  and  more  interesting.  Though  it 
is  always  dangerous  to  prophesy,  there  seems 
to  be  no  doubt  that  the  result  of  the  present 
world  crisis,  which  has  already  knit  most  of  the 
world  together  for  purposes  of  mutual  protec- 
tion and  destruction,  will  knit  it  still  more 
closely  together  in  the  future,  and  we  may 
even  hope  that,  instead  of  its  being  divided 
into  two  hostile  camps,  it  will  be  made  into 
one  great  union  for  mutual  co-operation  in  the 
great  work  oT  development. 

If  this  be  so,  it  is  very  necessary  that  we 
should,  all  of  us,  learn  to  think,  as  far  as  we 
can,  in  terms  of  world-wide  progress.  Think- 
ing   Imperially  was  a  big  thing  to  do  a  few 


156    INTERNATIONAL  CURRENCY 

years  ago,  but  great  and  splendid  as  the  British 
Empire  is,  there  is  something  still  more  great 
and  splendid  about  the  idea  of  a  League  of 
Nations,  leagued  together  to  promote  pros- 
perity and  progress,  breaking  down  barriers 
instead  of  setting  them  up,  and  combining 
with  one  another  in  doing  the  best  work  to  im- 
prove the  material  and  other  welfare  of  mankind. 

International  currency  and  the  means  by 
which  individuals  in  one  nation  make  payments 
to  those  in  others  thus  becomes  a  matter  of 
even  greater  importance  than  before  in  the 
light  of  the  new  sun  of  civilization  which  we 
hope  to  see  rise.  International  currency 
arrangements  are  one  of  the  devices  in  which 
business  men  have  shown  the  most  successful 
ingenuity  in  solving  a  very  difficult  problem. 
In  time  of  peace  the  machinery  worked  with 
extraordinary  smoothness  and  success.  Pay- 
ments were  made  for  the  huge  amount  of  goods 
and  services  constantly  exchanged  between 
nations  by  an  ingenious  mechanism  of  paper 
money  largely  uncontrolled  and  not  even  under- 
stood by  Governments,  with  the  occasional 
assistance  of  shipments  from  one  country  to 
another  of  gold  coin  or  bullion  when  the  paper 
and  credit  machinery  did  not  suffice  to  complete 
the  business. 

The  foundation  of  this  machinery  is  the  Bill 


BILLS    OF    EXCHANGE  157 

of  Exchange  already  referred  to  in  Chapter  IL 
as  a  specialized  form  of  currency,  the  use  of 
which  is  largely  restricted  to  business  men  and 
financiers,  and  is  seldom  handled  by  the  general 
public  in  its  retail  purchases.  As  was  then 
pointed  out,  a  Bill  of  Exchange  is  in  essence 
simply  an  order  to  pay,  and  the  cheques  with 
which  we  meet  our  family  expenses  are  merely 
a  form  of  the  Bill  of  Exchange,  payable  on 
demand  and  drawn  on  a  bank. 

In  order  to  instruct  our  bankers  to  pay  so 
many  pounds,  shillings,  and  pence  to  our 
butchers,  we  must  have  obtained  the  right  to 
do  so  either  by  depositing  money  with  the 
bank  or  by  getting  a  loan  from  it  in  order  to 
give  us  the  right  to  draw. 

In  its  original  form  the  Bill  of  Exchange 
was  an  order  exercised  by  somebody  who  had 
acquired  the  right  to  instruct  another  person 
to  pay  money  by  selling  him  goods  or  render- 
ing him  some  services  for  which  he  was  liable 
to  pay,  or,  in  some  cases,  merely  because  the 
drawer  of  the  Bill  considered  that  the  party 
drawn  upon  was  in  duty  bound  to  meet  it,  as 
in  the  example  when  English  monasteries  and 
abbeys  had  Bills  drawn  upon  them  by  a  Pope 
who  wanted  to  raise  the  wind  for  warlike  pur- 
poses. In  this  case  the  Bills  were  drawn,  and 
the  unfortunate  clergy  drawn  upon  were  then 


158    INTERNATIONAL  CURRENCY 

informed  that  they  would  be  excommunicated 
if  they  did  not  accept  and  meet  them. 

More  usually  the  seller  of  the  goods  shipped 
his  produce,  say  from  London  to  Damascus, 
and  drew  a  Bill  of  Exchange  on  his  Levantine 
buyer,  ordering  him  to  pay  the  price  of  the 
ofoods  either  to  the  seller  or  to  the  order  of 
anybody  else  whom  the  seller  might  name. 
As  the  Bill  was  usually  drawn  payable  two, 
three,  or  six  months  after  sight  or  date,  that  is 
to  say,  either  after  the  day  on  which  the  party 
drawn  on  saw  and  accepted  the  Bill  or  after 
the  day  on  which  the  drawer  of  the  Bill  drew 
it,  there  was  thus  a  period  of  time  granted 
during  which  the  buyer  of  the  goods  would  be 
able  to  dispose  of  them,  either  in  the  shape  in 
which  they  were  received,  or,  in  the  case  of 
raw  material,  after  working  them  up  into 
manufactured  articles. 

It  is  these  Bills  of  Exchange,  drawn  by 
the  shippers  of  goods  or  the  providers  of  ser- 
vices in  one  country  on  people  in  another 
country,  who  are  buying  the  goods  or  using  the 
services,  that  have  hitherto  constituted  the 
chief  supply  of  international  currency.  If  an 
English  merchant  shipped  coal  to  Scandinavia, 
he  has  a  Bill  of  Exchange  on  Scandinavia  to 
dispose  of  If  the  shipment  consists  of  ;^io,ooo 
worth  of  coal,  he  would  draw  on  Mr.  Olafsen 


BILLS   OF    EXCHANGE         159 

of  Christiania  for,  say  180,000  Norwegian 
kronors.  The  Bill  would  then  run:  "Two 
months  after  sight  pay  ourselves  or  order  the 
sum  of  180,000  kronors  for  10,000  tons  of  coal 
shipped  per  s.s.  Vulcan^'  or  words  to  that 
effect. 

Whatever  the  article  sold  or  whatever  the 
services  rendered  by  English  traders  to  a 
foreign  country,  all  items  of  visible  or  invisible 
export  either  produce  Bills  of  Exchange  on  the 
countries  to  which  the  goods  and  services  go, 
or  make  it  necessary  for  somebody  in  the 
country  to  which  the  goods  and  services  go,  to 
buy  a  Bill  on  London  with  which  to  complete 
payment.  For  example,  the  more  usual  mode 
by  which  the  payment  for  the  export  of  coal 
would  be  made  would  be  for  Mr.  Olafsen  to 
buy  from  his  banker  in  Christiania  a  sterling 
Bill  on  London  and  remit  it  to  the  seller  of  the 
coal.  This  he  would  only  be  able  to  do  if  the 
Norwegian  timber  merchants,  fish  merchants, 
and  other  exporters  of  Norwegian  produce, 
had  been  selling  goods  to  England  and  con- 
sequently had  been  able  to  draw  Bills  on  their 
English  buyers.  If  a  Norwegian  merchant  had 
sent  /■  1 0,000  worth  of  timber  to  a  London 
importer,  Olafsen's  banker  would  be  able  to 
buy  his  sterling  Bill  on  London,  which  he 
would   send   to  the   Hull  coal   merchant,  who 


i6o    INTERNATIONAL  CURRENCY 

could  dispose  of  it  through  his  banker  by  sell- 
ing it  in  the  London  discount  market.  If  the 
Bill  were  payable  at  sight  it  would,  of  course, 
be  presented  for  immediate  payment.  If  it 
were  drawn  payable  some  months  hence  it 
would  first  have  to  be  accepted  by  the  timber 
importer,  or  any  banker  or  finance  house  which 
he  had  induced  to  accept  Bills  on  his  behalf 
by  the  payment  of  the  usual  commission.  It 
would  then  be  sold  through  the  machinery  of 
the  Discount  Market,  and  probably  finally  be 
held  as  an  investment  by  some  English  bank 
until  it  became  due  at  maturity. 

By  this  highly  ingenious  machinery  for  ex- 
change between  one  country  and  another  all 
o-oods  or  services  produce  the  currency  in  which 
to  pay  for  themselves,  and  as  long  as  a  fairly 
even  balance  is  maintained  in  the  mutual  in- 
debtedness of  any  two  countries,  their  exchanges 
of  goods  and  services  can  be  paid  for  by  this 
simple  process  of  creating  currency  for  the  pur- 
pose with  extraordinary  ease  and  smoothness. 

There  is  no  need  to  enter  into  a  detailed 
exposition  of  the  various  kinds  of  goods  and 
services  exchanged  between  countries.  It  has 
been  done  over  and  over  again  in  the  text- 
books, and  all  that  we  have  to  bear  in  mind  for 
the  present  is  that  many  things  come  into  the 
question  of  the   mutual    indebtedness   of  the 


INVISIBLE    EXPORTS  i6i 

great  trading  countries  of  the  world  besides 
the  actual  volume  of  tangible  commodities 
shipped  or  transferred  from  one  country  to 
another. 

Reference  was  made  in  a  sentence  above 
to  visible  and  invisible  exports.  Visible  ex- 
ports, of  course,  are  the  articles  of  merchandise 
actually  shipped  or  transferred.  They  are  re- 
corded in  the  statistical  returns,  first  of  the 
shipping  country  and  afterwards  of  the  country 
to  which  they  go ;  but  on  the  way  they  have 
become  more  valuable,  having  come  across  the 
sea  from  the  place  where  they  were  made  to 
the  place  where  they  were  wanted.  Con- 
sequently we  find  that  if  we  add  up  the  imports 
and  exports  of  all  the  great  trading  countries 
together,  they  apparently  import  in  the  aggre- 
gate a  much  larger  amount  than  they  export. 
Clearly  this  is  not  so.  The  amount  imported 
and  exported  must  actually  balance,  but  the 
imports  are  more  valuable  for  the  reason 
already  given,  because  they  have  been  shipped 
to  the  country  where  they  are  wanted  and  con- 
sequently the  cost  of  shipment  and  insurance 
against  marine  and  other  risks  has  to  be  added 
to  the  value  with  which  they  left  the  country 
of  origin.  In  other  words,  if  coal  comes  from 
Hull  to  Christiania  on  a  British  ship,  this  is  a 
case  both  of  a  visible  and  invisible  export.    The 


i62    INTERNATIONAL  CURRENCY 

coal  is  the  visible  export,  the  services  rendered 
by  the  English  shipping  company  is  the  invisible 
export,  and  if  the  insurance  of  the  goods  while 
in  transit  has  been  effected  by  an  English  com- 
pany, that  is  another  invisible  export  to  be 
added  to  the  value  of  the  coal  before  it  reaches 
its  buyer. 

Another  obvious  kind  of  invisible  export  is 
provided  by  those  countries  which  every  year 
are  thronged  by  visitors  from  abroad,  the  most 
notable  examples  of  which  are  France,  Switzer- 
land, and  Italy,  and,  to  a  less  extent,  England 
and  Scotland.  On  this  account  England,  how- 
ever, probably  imports  more  than  she  exports. 
That  is  to  say,  the  British,  in  normal  times, 
travel  abroad  in  larger  quantities  and  spend 
more  money  in  so  doing  than  is  the  case  with 
regard  to  the  number  and  spending  powers  of 
the  foreigners  who  come  to  our  shores. 

England  imports  from  Europe  and  other 
places  to  which  her  citizens  travel,  health, 
change  of  scenery,  and  the  other  so-called 
pleasures  of  travel.  The  Englishmen  travelled 
to  the  other  countries  to  fetch  these  imports, 
and  the  money  that  they  spent  abroad  has  to 
be  constantly  made  good  by  the  shipment  of 
English  goods  either  to  the  countries  in  which 
the  money  is  spent  or  to  other  countries  so  as 
to  produce  credits  for   England,   or   else   the 


INTEREST  AND  INVESTMENTS   163 

sums  to  which  England  is  liable  owing  to  the 
spending  of  her  citizens  abroad  have  to  be  set 
off  against  the  sums  owed  by  other  countries 
to  England  on  account  of  interest  payable  for 
loans  made  in  the  past  or  on  other  accounts. 

It  was  calculated  that  in  the  days  before 
th':  war  the  citizens  of  the  United  States  used 
to  spend  about  50  millions  sterling  per  annum 
on  travelling  in  Europe,  and  so  the  war  which 
broke  out  in  Europe  in  19 14  compelled  the 
Americans  to  save  practically  the  whole  of  the 
sum  hitherto  devoted  to  this  form  of  invisible 
export,  because  it  became  too  dangerous  for 
travel  in  Europe  to  continue. 

Reference  has  already  been   made  to  in- 
terest on    loans.     Lending    money  abroad    is 
another  form  of  invisible  export.     If  England, 
as  she  used  to  do  in  old  times,  takes  up  an 
issue   of    Pennsylvania    Railroad    Bonds,    say 
for    twenty-five    million     dollars,    the    result 
is    that    America    exports    to    England    the 
Pennsylvania  Railway  Company's  promises  to 
pay  for  that  amount,  and  England  has  to  pay 
for  these  promises  to  pay,  which  her  investors 
put   away   into    their    tin    boxes,   by   shipping 
goods  to  America  or  by  setting  the  transaction 
off  against  any  payment  that  may  be  due  from 
America  to  her.     Afterwards,  every  half-year, 
when   the  interest  on  these    bonds  falls   due, 


i64    INTERNATIONAL  CURRENCY 

England  exports  the  coupons,  or  claims  to 
interest,  to  America  and  America  has  to  ship 
goods  in  payment  of  them.  When  the  bonds 
fall  due  for  repayment,  England  sends  the 
bonds  back  again  to  be  paid  for  by  America, 
and  so  whenever  one  country  invests  money 
in  another  it  first  of  all  makes  an  invisible 
import  by  importing  promises  to  pay ;  it  then, 
as  long  as  these  promises  to  pay  are  out- 
standing, makes  invisible  exports  periodically 
in  the  form  of  claims  for  interest,  and  finally 
makes  an  invisible  export  by  returning  the 
promises  to  pay  to  be  met  on  maturity. 

There  is  thus  at  all  times  an  enormous 
volume  of  cross-entries  in  the  international 
accounts.  Very  often  two  nations  will  be 
shipping  to  one  another  actually  the  same 
kind  of  produce ;  for  instance,  French  ladies 
sometimes  buy  tailor-made  clothes  in  London, 
when  tailor-made  clothes  are  the  fashion,  while 
at  the  same  time,  English  ladies  are  buying 
what  are  called  creations  and  costumes  from 
the  artists  who  produce  them  in  Paris. 

England,  with  the  biggest  and  most  widely 
distributed  trade  of  any  country  in  the  world, 
had  a  particularly  complicated  trade  balance. 
Before  the  war  she  had  what  is  called  an 
"adverse  trade  balance"  with  regard  to  visible 
trade,   that   is,  with  regard   to  tangible  goods 


THE   TRADE    BALANCE         165 

such  as  can  be  shipped  and  classified  in  a 
schedule,  of  130  millions,  this  being  the  amount 
by  which  her  imports  exceeded  her  exports. 
Quite  lately  she  was  assured  by  a  Colonial 
Premier  that  she  was  thereby  ruining  herself 
because  this  balance  had  to  be  paid  for  in 
golden  sovereigns.  This,  of  course,  was  un- 
true. On  the  other  side  of  the  account  she 
could  put,  according  to  estimates  made  by 
statisticians,  about  200  millions  a  year  for  in- 
terest on  loans  previously  made  abroad,  about 
100  millions  a  year  for  the  cost  of  the  services 
of  her  merchant  ships,  and  30  or  40  millions 
a  year  for  her  insurance  premiums,  bankers' 
commissions,  and  other  invisible  services  of  this 
sort.  On  the  invisible  trade  she  thus  had  a 
very  large  balance  in  hand,  and  this  balance 
she  used  to  use  by  investing  it  abroad  and  so 
continually  increasing  the  amount  due  to  her 
in  interest  which  other  councries  had  to  pay 
by  the  shipment  of  goods.  Every  time  a 
country  makes  an  export,  visible  or  invisible, 
she  thus  creates  a  claim  on  some  other  country, 
and  every  time  she  buys  anything  abroad,  the 
seHing  country  has  a  claim  upon  her,  and,  as 
long  as  a  fair  approach  to  equilibrium  is  main- 
tained, the  supply  of  bills  of  exchange  will  be 
about  equal  to  the  demand,  and  what  is  called 
the  rates  of  exchange  will  be  somewhere  near 

M 


i66    INTERNATIONAL  CURRENCY 

the  normal  level.  It  is  not  necessary  that  one 
country  should  anything  like  balance  its  trade 
with  each  of  the  other  countries  of  which  it 
is  a  customer.  For  instance,  Canada  used 
habitually  to  buy  from  America  much  more 
goods  than  she  sold  to  her.  On  the  other 
hand,  Canada  used  to  sell  to  England  much 
more  goods  than  she  bought  from  her,  and 
so  Canada  was  always  able  to  pay  for  the 
American  produce  that  she  bought  by  the 
bills  on  London  which  her  sales  of  wheat 
and  other  produce  to  England  enabled  her  to 
draw. 

By  this  system  of  balancing  the  claims  on 
and  due  to  the  various  countries  of  the  world 
owing  to  their  exchanges  of  goods  and  services, 
international  remittance  was  carried  out  with 
astonishing  ease  and  simplicity. 

There  were,  of  course,  occasions  in  the 
course  of  this  world-wide  exchange  of  goods 
and  services  on  which  one  country  or  another 
would  have  too  big  a  balance  either  on  the 
credit  or  the  debit  side.  For  example,  in 
times  before  the  war  it  was  a  normal  experi- 
ence for  America  to  owe  more  to  Europe  in 
the  first  eight  months  or  so  of  the  year,  and  to 
have  a  balance  in  her  favour  during  the  last 
four.  This  happened  because  America's  chief 
exports  in  those  times  consisted  of  the  produce 


EXCHANGE    iMOVEMENTS      167 

of  the   earth,    which  was    not  harvested   and 
shipped  until  the  autumn. 

During  the  first  eight  months  of  the  year 
America  had  to  pay  interest  to  Europe  on 
money  invested  in  her  industries  and  railroads 
by  the  capitalists  of  the  Old  World  ;  had  to 
pay  for  goods  imported,  and  also  had  to 
finance  the  great  expenditure  of  American 
travellers  on  the  Continent. 

During  the  last  four  months  the  shipping 
of  her  cereal  and  cotton  crops  turned  the 
balance  on  the  other  side,  and  America 
normally  had  more  money  to  take  from  Europe 
than  she  had  to  pay. 

This  seasonal  deficiency  in  the  early  part 
of  the  year  turned  the  Rate  of  Exchange, 
that  is  to  say,  the  price  at  which  Bills  on 
London  could  be  sold  in  the  New  York  market, 
against  America  and  in  favour  of  London. 
The  parity  price  for  these  Bills  was  $4.86.6 
to  the  pound  sterling.  This  is  the  rate  which 
expresses  the  relative  gold  value  of  the  coin- 
age of  the  two  countries. 

In  the  first  two-thirds  of  the  year,  owing 
to  the  preponderance  of  payments  that  America 
had  to  make  to  Europe,  the  demand  for  Bills 
on  London  would  naturally  be  greater  than 
supply,  for  it  will  be  remembered  that  a  country 
normally  produces  Bills  on  foreign  centres  by 


i68    INTERNATIONAL  CURRENCY 

selling  goods  and  services  to  foreigners,  so 
giving  it  a  right  to  order  foreigners  to  pay 
money  to  it  or  to  any  other  party  whom  it 
may  name. 

For  the  reasons  above  given,  during  the 
first  eight  months  of  the  year  Bills  on  London 
would  be  wanted  in  New  York  owing  to  the 
payments  that  America  had  to  make,  and 
would  be  scarce  owing  to  the  fact  that  her 
staple  exports  would  not,  at  that  time,  be 
coming  forward  freely.  Consequently  the 
spirited  bidding  of  those  who  had  payments 
to  make  in  Europe  would  force  the  price  of 
Bills  on  London  up,  and  the  Rate  of  Exchange 
would  tend  to  rise  above  the  parity  price.  This 
tendency  would  be  met  and  coped  with  to  a 
great  extent  by  the  creation  of  Bills,  not 
against  any  actual  shipment  of  produce,  but 
through  credit  arrangements  between  New 
York  and  London.  By  arrangement  between 
American  and  English  bankers  American 
bankers  would  draw  Bills  on  their  London 
correspondents,  which  Bills  represented  in  fact 
a  loan  from  the  English  firm  to  the  American. 

By  this  means,  at  a  time  when  Bills  on 
London  were  wanted  in  New  York,  they  were 
called  into  being  by  the  credit  machinery,  and 
so  steadied  the  Rate  of  Exchange  by  increas- 
ing the  supply  of  Bills  at  a  time  when  they 


EXCHANGE    MOVEMENTS      169 

were  scarce,  and,  artificially  but  most  efficaci- 
ously, met  the  needs  of  those  who  had  re- 
mittances to  make  to  London.  In  effect  New 
York  was  shipping  promises  to  pay  instead  of 
goods,  and  so  filling  the  gap  in  the  Exchange 
market. 

When  the  autumn  came  and  the  shipping 
of  America's  produce  brought  a  llood  of  cotton 
and  wheat  Bills  into  the  market,  the  Rate  of 
Exchange  would  tend  to  fall  rapidly,  and  the 
same  credit  operation  which  had  steadied  the 
upward  market  in  the  early  part  of  the  year 
would  steady  its  relapse  in  the  last  four  months, 
because  the  New  York  bankers  who  had 
created  Bills  on  credit  to  meet  the  demand  in 
the  early  part  of  the  year,  would  now  have  to 
buy  Bills  to  a  corresponding  amount  and  send 
them  to  their  London  correspondents  to  pay 
the  debts  thus  contracted. 

A  concrete  example  always  makes  these 
things  clearer.  We  will  suppose  that  in  May, 
when  the  first  flight  of  American  visitors  to 
Europe  is  beginning  to  increase  the  demand 
for  i)aymcnts  from  New  York  to  London,  the 
Rate  of  Exchange  goes  up  to  $4.87^;  then 
an  American  firm  draws  Bills  for  a  quarter  of 
a  million  sterling  on  various  London  corre- 
spondents, supplies  the  demand  in  New  York 
of   those    who    have     Euroj)ean    payments    to 


I70    INTERNATIONAL  CURRENCY 

make,  and  keeps  the  Rate  of  Exchange  from 
rising  too  rapidly.  In  September,  when  the 
wheat  harvest  and  the  cotton  crop  are  begin- 
ning to  produce  the  usual  flood  of  Bills  on 
London  and  the  Exchange  has  gone  down  to 
$4.85^,  the  New  York  firm  is  able  to  buy  up 
Billc  on  London  for  a  quarter  of  a  million,  so 
again  steadying  the  Rate  of  Exchange,  and 
preventing  a  further  fall,  and  ships  the  Bills 
to  its  London  correspondents,  so  redeeming 
the  debt. 

Finance  Bills  of  this  kind,  drawn  in  antici- 
pation of  the  usual  seasonal  movements  of 
trade,  thus  provided  a  very  real  benefit  to 
merchants  and  others  who  have  payments  to 
make,  by  narrowing  the  fluctuations  in  Rates 
of  Exchange,  and  they  also  provided  inter- 
national banking  with  profits,  which,  however, 
were  cut  extremely  fine  by  the  keenness  of 
competition. 

Like  most  of  the  other  ingenious  devices 
of  finance,  this  arrangement  was  liable  to  abuse, 
for  international  banking-houses,  having  dis- 
covered how  easily  and  comfortably  Bills  could 
be  drawn  on  one  another's  credit  and  dis- 
counted in  the  financial  centres  of  the  world, 
sometimes  made  use  of  these  facilities  for  the 
financing  of  operations  such  as  Stock  Ex- 
change speculation,  which  could  not  be  counted 


GOLD   SHIPMENTS  171 

on  with  the  same  confidence  as  the  movements 
of  the  harvests.  Sometimes  also  they  used 
them  for  purposes  such  as  the  provision  of 
fixed  capital  for  industry,  which  was  an  abuse 
of  the  Bill  of  Exchange,  the  justification  for 
which  is  a  shipment  of  goods  coming  forward 
for  consumption,  or  the  provision  of  services, 
now  or  in  the  immediate  future. 

Apart  from  this  liability  to  err,  which  is 
shared  by  most  human  institutions,  the 
machinery  of  Exchange  was  carried  on  with 
extraordinary  efficiency,  and  by  far  the  greater 
part  of  the  world's  exchanges  of  goods  and 
services  was  thus  financed  by  currencies  speci- 
ally created  for  each  transaction,  and  cancelled 
when  the  transaction  was  over  and  the  Bill 
had,  as  the  phrase  was,  "  paid  itself,"  by  the 
selling  of  goods. 

There  were  times,  however,  when  even 
with  the  help  of  finance  Bills  specially  created 
to  fill  the  seasonal  gap,  the  demand  for  Bills 
ran  so  far  ahead  of  the  supply  that  shipments 
of  gold  became  necessary.  This  happened 
when  the  Rate  of  Exchange — that  is  to  say,  the 
price  of  Bills — rose  or  fell  to  such  a  point  that 
gold  became  the  cheaper  form  of  remittance. 
To  go  back  to  our  London  and  New  York 
example,  if  in  the  early  months  of  the  year 
the  demand  for  remittances  to  London  forced 


172    INTERNATIONAL  CURRENCY 

the  price  in  New  York  up  to  $4.88|,  then  it 
was  cheaper  to  send  gold,  since  the  cost  of 
shipment  was  then  usually  less  than  the  differ- 
ence between  this  Rate  and  the  parity  price  of 
$4.86.6. 

Books  on  Foreign  Exchange  continually 
talk  as  if  those  who  had  payments  to  make  in 
London  would  calculate  for  themselves  the 
difference  between  the  price  at  which  they 
could  buy  the  Bill  on  London  and  the  terms 
on  which  they  could  ship  gold.  As  a  matter 
of  practical  fact,  the  shipment  of  gold  was 
chiefly  in  the  hands  of  experts  provided  with 
the  highly  technical  knowledge  required  for 
this  complicated  business.  They,  when  the 
Rate  of  Exchange  went  up  to  what  is  called 
"  gold  point,"  that  is  to  say,  the  price  at  which 
a  shipment  of  gold  is  the  cheaper  form  of  re- 
mittance, would  themselves  send  gold  across, 
and  so,  by  making  this  actual  shipment  of  valu- 
able produce,  would  have  a  claim  upon  London 
to  sell,  and  so  would  be  in  a  position  to  feed 
the  demand  of  those  who  wanted  to  buy  remit- 
tances. 

The  same  process  would  happen  on  the 
other  side  of  the  account  in  the  autumn  months, 
when  Bills  on  London  were  too  plentiful  to  be 
absorbed  by  the  normal  demand  on  the  part 
of  those  who  had  remittances  to  make.     When 


GOLD    MOVEMENTS  173 

the  price  went  down  to  the  importing  gold 
point,  it  would  pay  those  accustomed  to  the 
business  of  shipping  gold  to  bring  gold  across 
to  America,  buying  Bills  on  London  in  the 
New  York  Exchange  market  to  provide  them 
with  the  means  of  paying  for  it. 

Fluctuations  in  the  Exchange  were  thus 
originally  and  chiefly  based  on  the  international 
exchanges  of  goods  and  services,  but,  as  we 
have  seen,  they  were  complicated,  checked, 
and  modified  by  the  machinery  of  credit  which 
brought  Bills  into  being  when  they  were 
wanted,  and  produced  a  demand  for  them  when 
they  were  plentiful.  These  credit  operations 
were  also  employed  to  check  gold  movements, 
when  they  arrived  at  a  point  which  the  export- 
ing country  considered  inconvenient,  by  stimu- 
lating the  export  of  promises  to  pay. 

For  example,  when  the  course  of  Exchange 
was  against  London  in  the  autumn  season,  it 
was  customary  for  the  Bank  of  England  to 
raise  the  rate  of  discount  current  in  London 
by  putting  up  its  own  official  rate  and  taking 
measures,  if  necessary,  to  bring  the  market  rate 
up  after  it,  the  market  rate  being  the  rate  at 
which  Bills  could  be  discounted  by  the  London 
bill  brokers.  The  effect  of  thus  raising  the 
rate  of  discount  in  London  would  be  that 
American  bankers  and  others  who  had  control 


174    INTERNATIONAL  CURRENCY 

of  the  funds  which  the  American  shipments  of 
produce  were  putting  into  American  hands, 
would  be  incHned  to  leave  these  funds  in 
London  instead  of  selling  Bills  against  them 
in  the  Exchange  market  in  New  York,  and  so 
depressing  the  rate  of  exchange  in  New  York 
below  "gold  point."  For  example,  a  New 
Orleans  banker,  being  in  possession  of  a  large 
number  of  Bills  on  London  produced  by  ship- 
ments of  cotton  made  by  his  customers  to 
England,  would,  if  the  rate  of  discount  in 
London  were  raised  from  4  to  5  per  cent,  be 
less  inclined  to  turn  his  Bills  into  cash  because, 
owing  to  the  rise  in  the  rate  of  discount,  he 
would  get  less  cash  for  them.  Consequently 
he  would  be  inclined  to  hold  the  Bills  as  an 
investment  instead  of  turning  them  into  cash 
and  selling  sight  drafts  against  them  ;  and  the 
market  in  Exchange  would  be,  to  that  extent, 
steadied.  At  the  same  time  American  dealers 
in  money  would  be  encouraged  ito  buy  Bills 
payable  at  sight,  so  putting  themselves  in 
funds  in  London,  and  investing  the  proceeds 
in  London's  Discount  market. 

By  these  means,  by,  in  effect,  raising  the 
rate  that  the  London  market  was  prepared  to 
pay  for  money,  foreign  holders  of  claims  on 
London  would  be  discouraged  from  presenting 
them  and  foreign  holders  of  money  would  be 


CREDITOR   COUNTRIES        175 

encouraged  to  make  remittances  to  London  in 
order  to  take  advantage  of  the  higher  rate. 

Apart  from  this  power  of  attracting  foreign 
money  by  changes  in  the  ruhng  rate  of  dis- 
count, creditor  countries  such  as  England  and 
France  before  the  war  were  able,  at  any  time, 
to  turn  the  Exchanges  of  the  world  in  their 
favour  by  calling  in  money  that  they  had  lent 
to  other  countries,  or  sigjply  by  ceasing  to 
invest  abroad. 

As  we  saw  above  in  our  examination  of 
England's  account  with  her  foreign  customers, 
she  had  an  annual  surplus  in  her  favour,  result- 
ing from  her  exchange  of  goods  and  services 
with  the  rest  of  the  world,  of  something  like 
200  millions  sterling?  which  she  used  to  invest 
in  foreign  countries.  If  she  chose  to  stop  this 
process,  which  those  in  charge  of  her  monetary 
machine  could  encourage  her  to  do  by  raising 
the  rate  of  interest  at  home,  the  Exchanges  of 
the  world  would  tend  inevitably  to  move  in 
her  favour.  If,  as  happened  at  the  beginning 
of  the  war,  she  not  only  stopped  the  process 
of  investing  abroad,  but  called  in  all  the  short 
credits  which  she  had  outstanding  in  foreign 
countries,  the  Exchanges  of  the  world  went  in 
her  favour  with  such  a  mighty  rush  that  they 
broke  the  machinery. 

Countries  which  are  not  in  this  comfortable 


176    INTERNATIONAL  CURRENCY 

position  have  devised  an  ingenious  means  for 
being  able  to  regulate  the  Exchanges  when 
they  move  against  them,  by  the  establishment 
01  what  is  called  "a  o^old  exchansfe  standard." 
Under  this  system  the  country  either  keeps  a 
balance  in  some  important  foreign  centre  or 
keeps  in  its  own  hands  a  steadily  maintained 
store  of  claims  upon  some  foreign  centre.  For 
example,  before  the  war  it  was  customary  for 
the  Austrian  State  Bank  continually  to  hold  a 
large  amount  of  Bills  on  London.  If  the 
Exchange  between  Vienna  and  London  went 
in  favour  of  the  latter  more  rapidly  than  seemed 
convenient  to  the  former,  the  StaLe  Bank  could 
check  the  movement  by  supplying  the  market 
with  sterling  Bills. 

India  and  Brazil  used  to  keep  large  balances 
in  London  with  a  view  to  the  same  object,  that 
is  to  say,  the  power  of  drawing  upon  these 
balances  and  so  providing  the  local  market  in 
Bombay  or  Rio  de  Janeiro  with  Bills  on  London 
if  there  were  too  great  a  scarcity  of  them. 
Mexico  kept  a  balance  in  New  York  for  the 
same  reasons.  The  system  works  admirably 
in  normal  times,  and  as  long  as  the  balance  of 
trade  does  not  go  too  violently  against  the 
country  which  employs  it,  and  as  long  as  the 
country's  credit  is  good  enough  to  enable 
finance  Bills  to  be  created  if  necessary  to  fill 


STATE-MADE    EXCHANGE 


// 


the  gap.  It  broke  down,  however,  in  Mexico 
when  plunged  in  civil  war,  so  that  her  power 
of  export  was  diminished  and  her  credit  was 
impaired. 

It  is  not  a  panacea  for  Exchange  diseases, 
and  no  panacea  against  these  ills  can  be  in- 
vented for  a  country  which  outruns  the  con- 
stable beyond  a  certain  point,  but  it  is  a  highly 
useful  and  beneficial  system  when  carefully 
regulated.  By  its  means  the  Government  is 
able  to  fix  a  local  Rate  of  Exchange  and  main- 
tain it  within  reasonable  limits  by  the  sale  and 
purchase  of  drafts  as  occasion  may  demand. 
The  system,  in  fact,  has  worked  so  well  for 
small  and  financially  dependent  countries  that 
it  has  been  suggested  that  it  might  be  adopted 
with  advantage  by  the  leading  financial  coun- 
tries such  as  America,  England,  and  France, 
that  their  Governments  should  establish  sub- 
stantial balances  with  one  another  and  with 
other  countries,  and  should  take  over  the  whole 
machinery  of  international  remittance. 

Some  even  go  so  far  as  to  suggest  that 
some  sort  of  international  Bank  Note  should 
be  invented  and  that  the  golden  idol  should  be 
knocked  off  its  pedestal  and  handed  over  to  be 
used  up  by  jewellers,  picture  framers,  and 
dentists.  It  seems  to  me  that  there  are  many 
objections   to   thfse   rather    idealist   [)roposals. 


178    INTERNATIONAL  CURRENCY 

Until  we  have  abolished  war  no  country  would 
care  to  have  a  large  balance  in  any  centre 
where  it  might  be  liable  to  sequestration  if  war 
happened  to  break  out. 

The  suggestion  that  the  machinery  of  inter- 
national remittances  should  be  put  into  the 
hands  of  Government  calls  up  a  vision  full  of 
shuddering  horror,  of  red  tape,  forms  to  be 
filled  in,  and  delays  and  circumlocution  which 
might  be  a  very  serious  drag  on  business.  It 
is  also  very  safe  to  expect,  at  least  from  pre- 
vious experience  of  English  enterprise  as  man- 
aged by  Government,  that  the  business  would 
be  carried  on  at  a  loss  at  the  expense  of  the 
taxpayers  of  the  countries  involved.  Never- 
theless there  is  much  to  be  said  for  closer  co- 
operation between  the  great  financial  centres 
of  the  Eastern  and  Western  hemispheres,  and  a 
beginning  in  this  direction  has  already  been 
made  by  the  knitting  of  closer  relations  between 
the  Federal  Reserve  Board  of  the  United  States 
and  the  Bank  of  England  in  London. 

If,  and  when,  a  League  of  Nations  has  been 
formed  and  formally  established,  it  may  perhaps 
be  possible  to  consider  the  establishment  of 
some  international  form  of  paper  currency 
which  will  pass  all  over  the  world,  or  at  least 
in  those  countries  included  in  the  league  ;  but 
the  difficulties  involved  by  such  a  system  are 


TURNING   LOOSE   A  TERROR    179 

so  great,  and  there  are  so  many  unavoidable 
difficulties  ahead  to  be  faced  in  the  period 
of  reconstruction,  that  it  seems  unwise  to  add 
to  them  by  turning  loose  the  international 
currency  reformer. 


CHAPTER   VIII 

INVESTMENT   ABROAD 

When  the  investor  sends  his  money  abroad  he, 
as  a  general  rule,  takes  greater  risks  and  ex- 
pects to  earn  a  higher  rate  of  interest  or  of 
profit  on  his  investment.  The  more  enter- 
prising the  nature  of  the  operation  involved  by 
sending  money  to  fertilize  the  uttermost  parts 
of  the  earth,  the  greater  is  the  responsibility 
thrown  upon  the  financial  leaders  who  handle 
the  business.  With  a  view  to  the  eternal 
craving  of  the  ordinary  man  for  short-cuts  to 
fortune,  it  follows  that  the  more  easily  he  is 
tempted  to  send  money  over-sea,  the  more 
care  has  to  be  taken  by  those  who  provide  in- 
vestment in  Loans  and  Companies  abroad  and 
gather  in  money  from  their  fellow-countrymen 
to  finance  them. 

Many  people  think  that  when  the  war  is 
over  very  little  investment  abroad  will  be..done 
by  any  of  the  great  lending  countries  for  some 
years  to  come.     This  belief  is  based  on  the 


THE    HOME    DEMAND  i8i 

expectation  that,  in  the  first  place,  there  will 
be  a  great  scarcity  of  capital  as  compared  with 
the  demand  for  it  for  the  development  of  home 
industries  in  all  countries  ;  that,  in  the  second, 
the  investor,  after  the  experiences  of  the  present 
war  on  the  part  of  those  who  have  been  un- 
fortunate enough  to  have  had  money  invested 
in  enemy  countries,  will  prefer  henceforward  to 
keep  his  money  at  home ;  and  that  in  the  third 
place,  official  regulation  will  exercise  strict  con- 
trol over  the  issue  of  foreign  securities  in  the 
great  money-lending  centres. 

None  of  these  assumptions  is  necessarily 
true.  It  is  quite  probable  that  each  of  them 
may  exercise  a  certain  amount  of  influence, 
but  to  expect  that  they  will  be  strong  enough 
altogether  to  dam  the  stream  of  foreign 
investment  is  perhaps  too  sweeping  an  as- 
sumption. 

With  regard  to  Number  i,  it  is  certainly 
true  that  in  all  the  great  money-lending  coun- 
tries there  is  a  great  deal  of  work  at  home 
clamouring  to  be  done,  but  being  held  up  by 
the  demands  on  the  money  market  for  war 
purposes,  and  it  is  very  likely  true  that  the 
demand  for  capital  for  these  home  purposes 
will  come  first,  either  owing  to  sentiment  or  to 
regulation,  before  the  outward  flow  of  capital 
is  resumed. 

N 


i82         INVESTMENT  ABROAD 

On  the  other  hand,  the  assumption  that 
capital  will  necessarily  be  very  scarce  after  the 
war  is  one  that  remains  to  be  proved.  Capital 
after  all,  as  has  been  pointed  out  in  an  earlier 
chapter,  is  merely  the  margin  of  current  pro- 
duction which  is  available  for  the  equipment  of 
industry  after  the  immediate  needs  of  the 
population  have  been  satisfied ;  and  if,  as  is 
quite  possible,  the  industrial  lessons  of  the  war 
are  well  and  truly  learnt,  and  the  improved 
organization  and  efficiency  is  made  use  of  in 
order  to  promote  a  great  increase  in  the  output 
of  goods  for  peace  purposes,  and  if,  at  the  same 
time,  the  needs  of  the  community  for  imme- 
diate consumption  are  still  modified  by  the 
austere  ideals  set  up  by  the  war,  then  it  is 
quite  possible  that  the  supply  of  capital  may 
be  very  considerable ;  and  that  it  may  be 
actually  encouraged  to  go  abroad,  both  officially 
and  unofficially,  in  order  to  stimulate  the  pur- 
chasing power  of  the  more  backward  countries, 
as  necessarily  follows  when  capital  is  being 
placed  freely  abroad.  In  other  words,  when 
the  creditor  countries  lend,  their  financiers  lend, 
in  effect,  the  goods  which  their  industrial 
machinery  is  producing.  The  more  the  finan- 
ciers lend  the  keener  is  the  demand  for  the 
commodities  produced  by  industry,  because 
the  borrowing  countries  are  thus  able  to  supply 


AX    UNLUCKY   INVESTMENT    i8 


J 


themselves  with  commodities,  giving  in  pay- 
ment the  money  invested  by  the  financiers  in 
the  borrowers'  promises  to  pay  some  day.  A 
foreign  Government  sells  its  bonds  to  the  City, 
and  uses  the  City's  money  to  pay  for  imported 
goods. 

As  to  Number  2,  the  reluctance  of  investors 
to  go  abroad  after  the  experiences  of  the  pre- 
sent war,  this  will  certainly  be  a  very  strong 
bar  to  over-seas  investment  if  the  war  should 
end  in  such  a  way  that  there  is  any  likelihood, 
or  even  possibility,  of  its  recurrence.  Unfor- 
tunate English  shareholders,  for  example,  in 
the  Imperial  Continental  Gas  Company  will 
have  had  reason  to  be  sorry  that  they  made 
what,  at  the  time,  looked  like  a  very  judicious 
investment.  The  company  was  one  of  the 
most  successful  and  best  managed  in  the  world, 
and  its  stock  used  to  pay  a  regular  dividend  of 
9  per  cent,  and  stand  at  a  very  high  premium. 
Unfortunately  for  its  shareholders  one  of  the 
most  successful  parts  of  the  company's  enter- 
prise was  the  gas  that  it  supplied  to  the  City 
of  Berlin  and  other  German  towns ;  conse- 
quently, since  the  war  broke  out,  the  company 
has  been  unable  to  bring  home  a  considerable 
proportion  of  its  revenue,  and,  in  spite  of  the 
very  great  fmancial  strength  that  it  had  built 
up    during    many    )'ears    of    well  -  conducted 


tS4         investment   ABROAD 

enterprise    before    the   war,   its    shareholders 
have  received  no  dividend  since  May,  191 5. 

If,  then,  the  war  ends  with  conditions  of 
diplomacy  and  international  politics  which  make 
any  repetition  of  the  present  barbarism  pos- 
sible, it  will  be  the  natural  instinct  of  most 
cautious  investors  to  keep  their  money  at  home, 
or  at  least  only  to  place  it  in  countries  with 
which  they  believe  their  own  nation  can  never, 
by  any  possibility,  quarrel. 

If,  on  the  other  hand,  as  we  all  hope,  the 
present  war  ends  in  such  a  way  that  the  danger 
of  conflict  on  such  a  scale  is  made  definitely 
impossible  for  the  future,  and  if,  at  the  same 
time,  there  is  a  great  development  in  inter- 
national amity  and  co-operation,  it  seems  pro- 
bable that  there  will  be  a  great  movement  in  the 
direction  of  freer  interchanges  of  commodities 
and  services  between  the  nations,  and  conse- 
quently of  an  expansion  of  international 
investment. 

With  regard  to  Number  3,  the  official  re- 
gulation of  investment  at  home  and  abroad, 
that  certainly  seems  to  be  inevitable  for  a  time. 
In  all  the  countries  that  now  have  been  long 
at  war  business  men  of  all  kinds,  financiers, 
industrialists,  and  commercial  men,  seem  to  be 
fairly  unanimous  in  hoping  that  the  restrictions 
and   control   with  which   they  have  struggled 


IMPORTS  AND   EXCHANGE     185 

during  the  course  of  the  war,  will  be  removed 
as  soon  as  possible ;  but  with  regard  to  one 
matter  there  seems  to  be  an  overwhelmine 
necessity  for  regulation  for  some  time  after  the 
war,  and  that  is  with  regard  to  imports. 

Problems  of  exchange  seem  to  be  likely, 
when  the  war  is  over,  to  be  so  important,  at 
least  among  those  countries  which  have  any 
regard  to  their  financial  prestige  abroad,  that 
it  will  be  hardly  possible  for  the  State  to 
throw  the  door  wide  open  and  to  say  that 
goods  are  to  be  poured  into  the  country  as 
fast  as  those  who  have  money  to  spend  choose 
to  spend  it  upon  them,  without  any  regard  to 
the  desirability  of  the  kind  of  goods  that  the 
private  buyer  is  importing. 

With  regard  to  visible  goods  this  need  for 
regulation  will  be  emphasized  by  the  scarcity 
of  shipping  space  that  seems  likely  to  produce 
a  difficult  problem  when  the  war  is  over. 

Invisible  imports,  such  as  promises  to  pay, 
are  not  affected  by  this  part  of  the  problem, 
but  they  will  have  a  very  considerable  effect 
upon  exchange,  and  may  therefore  be  con- 
sidered likely  to  remain  for  some  time  under 
official  or  semi-official  control.  The  commonly 
used  phrase,  "the  export  of  capital,"  is  perhaps 
rather  likely  to  mislead  the  careless  observer 
as  to   what  really  hap[)ens  when   the  lending 


iS6        INVESTMENT  ABROAD 

country  makes  an  advance  to  an  over-sea  bor- 
rower. The  promises  to  pay,  which  are  the 
tangible  expression  of  the  capital  lent,  are  not 
exported  but  imported,  and  if  we  think,  not  of 
export  of  capital  but  of  import  of  securities,  it 
'hus  becomes  clear  that  the  process  of  invest- 
ment abroad,  which  implies  the  importing  of 
.securities,  necessarily  has  the  same  effect  upon 
the  country's  exchange  as  any  other  import, 
namely  turning  the  exchange  against  the 
importing  country. 

For  example,  if  Brazil  exports  one  million 
pounds'  worth  of  Brazilian  Bonds  representing 
a  loan  which  is  being  granted  by  England  to 
Brazil,  the  effect  of  the  operation  is  that 
England  has  to  pay  Brazil  a  million  or  place 
a  million  at  Brazil's  disposal.  Brazil  has  Bills 
on  England  for  a  million  to  sell,  and  this  sale 
would  tend  to  turn  the  exchange  in  favour  of 
Brazil  and  against  England.  For  these  reasons 
it  may  be  that  in  the  case  of  those  countries 
which  make  it  a  point  of  honour  to  pay  atten- 
tion to  the  question  of  the  Rate  of  Exchange 
and  to  financial  prestige,  regulation  of  over- 
seas investments  may  be  desirable  from  this 
point  of  view,  at  any  rate  in  the  difficult  first 
few  months  that  may  follow  the  end  of  the  war  ; 
and  it  is  also  possible  that  if  the  demands  of 
home  enterprise  for  capital  are   insistent  and 


A   SHORTLIVED    BAR  187 

unsatisfied,  political  and  other  pressure  may 
be  brought  to  bear  upon  the  Governments  so 
that  the  needs  of  the  home  market  for  capital 
may  be  supplied  first.  Nevertheless,  it  will 
probably  soon  be  recognized  that  in  order  to 
join  freely  in  the  great  international  trade 
movement  which  may,  if  all  goes  well,  follow 
the  end  of  the  war,  it  will  be  necessary  for 
every  nation  to  put  as  little  bar  as  possible 
upon  the  free  import  of  securities  ;  and,  as  has 
been  pointed  out  above,  since  it  is  quite  pos- 
sible that  the  supply  of  capital  may  be  much 
freer  than  is  expected  in  certain  quarters,  the 
need  for  official  regulation  may  soon  be  brought 
to  an  end  by  the  weight  of  purely  economic 
factors. 

It  thus  appears  that  the  expected  suspen- 
sion of  foreign  investment  when  the  war  is 
over  is  based  on  assumptions,  none  of  which 
are  certain  and  all  of  which,  though  they  may 
perhaps  be  called  probable,  are  not  likely  to 
last  long.  If  this  be  so,  it  follows  that  those 
who  handle  the  machinery  of  finance  will  soon 
be  busy  again  on  this  most  difficult  and  re- 
sponsible part  of  their  work,  namely  the  pro- 
vision of  capital  for  foreign  countries  from 
those  in  which  more  is  saved  than  is  required 
for  home  purposes. 

It  is  sometimes  contended  that  the  creditor 


iSS         liNVESTMENT  ABROAD 

countries  in  the  past,  especially  France  and 
England,  have  developed  this  business  of  in- 
ternational investment  at  the  expense  of  those 
who  wanted  and  could  not  get  capital  for  use 
at  home ;  and  it  is  argued  that  what  happened 
before  the  war  is  an  additional  reason  for  the 
continuance,  not  for  a  time  only,  but  for  all 
time,  of  official  regulation  of  capital  issues, 
so  that  money  which  might  be  used  at  home 
shall  not  go  abroad,  but  shall  stay  at  home  and 
act  upon  the  supply  of  capital  for  home  use. 

This  subject  is  extremely  complicated  and 
difficult,  because  it  is  so  closely  associated  with 
problems  of  international  politics  that  it  is 
difficult  to  regard  it  from  the  purely  economic 
point  of  view.  In  fact,  it  is  not  possible  or 
desirable  so  to  regard  it.  We  have  to  look  at 
these  things  from  the  point  of  view  of  inter- 
national interest. 

It  is  perfectly  true  that  when  we  lend  money 
to  other  countries  we  assist  their  development 
and  stimulate,  in  the  first  place,  their  demand 
for  goods,  which  it  is  at  least  probable  that  we 
shall  be  asked  to  supply,  and  afterwards  their 
demand  for  labour,  which  tends  to  help  the 
process  of  emigration  by  which  we  in  England 
have  in  the  last  century  lost  so  many  valuable 
citizens.  It  is  at  least  possible  that  if  we  had 
lent  less  money  abroad,  our  home  industries 


THE    PRACTICAL    RESULT     189 

would  have  been  more  cheaply  supplied  with 
capital,  and  might  therefore  have  been  by  this 
time  on  a  more  extensive  scale,  employing  a 
larger  volume  of  labour.  On  the  other  hand, 
if  our  capital  had  not  gone  abroad  to  fertilize 
the  uttermost  parts  of  the  earth,  the  develop- 
ment of  the  total  output  of  mankind's  material 
energy  would  have  been  much  slower,  and  the 
volume  of  goods  continually  poured  into  this 
country  for  the  food  and  enjoyment  of  its 
inhabitants  would  have  been  very  much  less. 

By  our  international  investment  policy  be- 
fore the  war  we  helped  to  produce  all  kinds  of 
goods  all  over  the  world  in  places  in  which 
they  could  be  produced  most  freely  and  cheaply. 
Consequently  in  our  time  of  need  we  were 
able  to  draw  upon  the  rest  of  the  world  to 
supply  us  with  things  that  we  wanted  for  the 
war.  Against  which  the  opponents  of  the 
system  can  always  reply  that,  if  we  had  not 
sent  so  much  capital  abroad,  we  should  have 
been  in  a  position  to  rely  much  more  on  our- 
selves and  much  less  on  our  over-seas  sources 
of  supply,  and  consequently  we  should  have 
been  much  less  vulnerable  to  the  attacks  of 
the  submarine.  We  might  not  have  had  such 
large  contingents  coming  to  our  help  from  the 
Dominions,  but  wc  miij^ht  have  been  able  to 
produce  a  larger   population    at   home   ready 


190        INVESTMENT  ABROAD 

to  go  into  the  firing  line.  Perhaps ;  but  when 
we  remember  how  much  virgin  soil  has  been 
opened  up  in  the  last  century  by  our  invest- 
ments abroad,  we  have  to  acknowledge  that 
without  them  there  would  have  been  much  less 
production  and  consequently  much  fewer  people 
in  existence  and  bound  to  us  by  trade  relations. 

This  is  a  question  which  can  be  argued 
round  indefinitely.  It  becomes  finally  like  a 
currency  problem  or  a  religious  conviction, 
almost  a  matter  of  belief  concerning  which 
demonstration  by  argument  is  impossible.  But 
at  least  it  may  be  pointed  out  that  the  expe- 
riences of  the  present  summer  *  show  that  we 
might,  if  we  had  tried  to  bring  up  a  larger 
population  on  our  own  resources,  have  been 
liable  to  natural  and  seasonal  reverses  which 
might  have  been  almost  as  unpleasant  in  their 
consequences  as  the  submarine. 

The  question  we  have  to  decide  is  whether 
it  is  better  for  each  nation  to  do  as  much  as  it 
can  and  grow  as  much  as  it  can  for  itself  within 
its  own  borders,  or  to  reach  out  the  largest 
possible  number  of  tendrils  and  branches  all 
over  the  world  so  as  to  get  as  much  nourish- 
ment as  possible  from  foreign  soils,  and  to 
make  as  many  connections  as  may  be  with 
foreign  consumers  and  customers  ?  Once  again 
*  Written  in  1917. 


HOW  WILL  THE  WAR  END?    191 

we  find  that  the  end  of  the  war,  the  way  in 
which  this  war  ends,  will  go  a  long  way  towards 
answering  the  question. 

If  it  ends  in  the  wrong  way,  to  be  followed 
first  by  a  pause  of  exhaustion  and  then  by  a 
period  of  hasty  armament,  and  then  by  another 
war  with  all  the  present  weapons  of  destruction 
very  much  more  ef^cient  and  destructive,  in 
that  case  it  is  almost  idle  to  consider  about  any 
of  these  economic  problems,  for  the  only 
problem  before  any  nation  will  be,  how  to 
make  itself  all  sting  so  as  to  be  able  to  join 
most  efficiently  in  the  great  stinging  match 
which  will  destroy  such  civilization  as  now 
exists. 

If  President  Wilson's  League  of  Nations 
is  realized  into  such  a  shape  as  many  quite 
practical  people  are  now  sketching  in  their 
dreams,  then  it  would  seem  that  all  the  old- 
fashioned  contentions  in  favour  of  the  utmost 
economic  freedom  and  the  readiest  possible 
movement  of  capital,  goods,  services,  ideas 
and  men  from  one  country  to  another  will  have 
come  back  to  their  old  strength,  and  much 
more  than  their  old  strength. 

The  weakness  of  the  economic  argument 
that  whatever  was  best  for  the  economic  pro- 
gress of  mankind  and  for  the  greatest  possible 
increase  in  the  world's  material  output,  was  also 


192         INVESTMENT  ABROAD 

best  for  any  individual  nation  which  had  any 
part  in  international  trade,  was  based  upon  the 
fact  that  there  was  always  danger  of  a  rupture 
of  the  whole  economic  machine  by  some  ridicu- 
lous barbarism  in  the  shape  of  war  initiated  by 
some  ambitious  potentate.  If  we  are  to  be 
quit  of  this  danger  in  future,  and  mankind  is  to 
be  free  to  develop  the  resources  of  the  world 
in  the  places  and  in  the  manner  that  is  most 
convenient  and  conducive  to  their  output,  then 
the  international  ideal  which  has  served  men 
so  well  for  many  centuries  by  lifting  them  out 
of  themselves  and  their  own  petty  interests 
into  something  wider,  will  begin  to  look  very 
narrow  and  parochial  by  the  side  of  the  great 
world-wide  ideal  which  President  Wilson  has 
put  before  the  world  as  the  thing  to  be  achieved 
by  the  present  war. 

If  this  be  so,  then  it  is  the  business  of 
those  who  manage  the  machinery  of  finance  to 
take  good  care,  working  with  the  experience 
of  the  past,  that  international  investment  shall 
be  free  in  the  future  from  the  dark  stains  that 
have  marked  its  past  career.  Properly  con- 
ducted international  finance  is  a  very  strong 
power  for  good.  Its  effect  is  that  the  citizens 
of  one  country  get  a  good  investment,  and  that 
the  citizens  of  another  country  get  resources 
that  they  need  in  order  to  develop  its  produc- 


THE    PRACTICAL   TEST        193 

tive  power.  Thereby  the  total  output  of  the 
world's  material  goods  is  increased,  and  the 
power  of  mankind  to  produce  and  enjoy 
the  good  things  of  the  earth  is  multiplied. 

On  the  whole,  international  finance  can 
claim  that  its  work  has  been  clean  and  bene- 
ficial. If  it  had  not  been  so  it  could  not  have 
gone  on,  because  it  is  continually  tried  by  the 
strictly  material,  but  nevertheless  searching, 
test  of  its  ability  to  pay  both  the  parties  who 
engage  in  it.  It  might  be  that  this  test  might 
in  some  cases  be  applied,  and  survived,  although 
at  the  same  time  there  might  be  moral  con- 
siderations which  would  still  leave  a  sceptical 
critic  unsatisfied.  But  these  things  cannot 
happen  often  or  continuously.  Unless  the 
exchange  of  capital  between  nations  is  on  the 
whole,  and  in  the  long  run,  beneficial  to  both 
[parties,  there  is  no  reason  why  either  of  them 
should  engage  in  it.  The  test  is  constantly 
applied  by  which  finance  is  asked.  Has  this 
application  of  capital  produced  that  increase  in 
the  output  of  material  goods  which  is  its 
economic  justification  ?  If  it  has  not,  then  the 
necessary  resources  for  meeting  the  interest  or 
profit  on  the  capital  applied  will  not  be  forth- 
coming. Either  the  lender  will  have  to  go 
without  his  interest,  or  the  borrower  will  find 
himself  hard  put  to  it  to  pay  it.     Whenever  it 


194        INVESTMENT   ABROAD 

is  found  that  the  lender  and  the  borrower  are 
both  satisfied,  we  may  be  certain  that  the 
material  goods  which  are  required  to  provide 
interest  on  capital  invested  have  been  delivered. 

Nevertheless,  though  on  the  whole  there 
can  be  no  doubt  that  international  finance  has 
done  enormous  service  in  quickening  mankind's 
production  and  enjoyment  and  in  uniting  the 
whole  world  into  one  great  cosmopolitan  market, 
it  is  equally  certain  that  many  grave  errors 
have  been  committed  in  the  past  in  this  pro- 
cess of  the  international  exchange  of  capital, 
and  now  that  the  whole  financial  machine  is 
working  under  very  close  and  critical  scrutiny 
it  is  very  desirable  to  make  use  of  these  lessons 
of  the  past  to  avoid  similar  scandals  in  the 
future. 

If  we  are  about  to  build  a  new  world  and 
make  a  fresh  start  in  most  departments  of  life, 
it  is  essential  that  those  who  handle  capital 
should  see  that  it  is  well  and  cleanly  used, 
or  we  are  only  too  likely  to  find  the  whole 
business  handed  over  to  Government  Depart- 
ments, with  the  lamentable  results  that  may 
be  expected  when  Government  officials  are 
asked  to  do  anything  outside  their  usual 
routine. 

Great  as  is  the  power  of  good  finance  for 
good,  the  power  of  bad  finance  for  rottenness, 


UIRTY    BUSINESS  195 

both  in  the  borrowing  country  and  in  the 
lender,  is  almost  unHmited.  In  the  case  of 
the  lender,  when  questionable  securities  are 
handled  and  offered  to  the  public,  the  business 
will  be  done  by  third-rate  firms,  because  firms 
of  high  standing  would  not  touch  it,  and  the 
methods  of  third-rate  firms  are  likely  to  be 
more  than  questionable.  Big  underwriting 
commissions,  extravagant  advertising  in  the 
Press,  perhaps  a  certain  amount  of  actually 
corrupt  puffing,  market  manoeuvres,  all  the 
machinery,  in  short,  by  which  bad  wares  are 
placed  upon  a  greedy  and  gullible  public  is  set 
to  work  at  its  full  capacity.  All  the  specula- 
tive allurements  of  a  cheap  security  with  high 
yield  of  interest  are  displayed  to  distract  the 
public  from  the  austere  path  of  sound  finance. 
When  the  day  of  reckoning  comes  there  is  an 
outburst  of  anger  against  reckless  and  impro- 
vident borrowers,  who  are  alleged  to  have 
taken  good  money  without  any  intention  of 
meeting  the  service  of  the  debt.  Bondholders 
then  forget  the  speculative  risk  that  was  obvi- 
ously expressed  in  the  price  at  which  the 
securities  were  offered,  and  regard  themselves 
as  virtuous  investors  who  have  been  tricked 
out  of  their  money,  whereas  they  are  in  fact 
foolish  speculators  who  have  made  a  loss 
which  must  have  been  an  obvious  possibility 


196         INVESTMENT  ABROAD 

at  the  time  when  they  entered  into  the 
gamble. 

Much  is  heard  about  the  levity  and  im- 
providence of  economically  backward  countries, 
and  their  readiness  to  enter  into  liabilities 
which  they  cannot  possibly  meet ;  little,  if  any- 
thing, is  said  about  the  serious  responsibility 
which  attaches  to  everybody  who  lends  money 
to  people  who  do  not  know  how  to  use  it, 
without  the  exercise  of  proper  care  to  see  that 
they  use  it  in  the  right  way.  A  process  of 
composition  involving  a  reduction  in  the  rate 
of  interest,  and  a  scaling  down  of  the  capital 
of  the  debt,  is  the  usual  sequel  of  these  re- 
criminations. A  few  people  learn  a  lesson, 
which  they  probably  very  shortly  forget,  and 
so  the  game  goes  on. 

In  the  borrowing  country  the  results  arc 
probably  even  more  evil.  When  a  Govern- 
ment is  encouraged  by  the  ease  with  which  it 
can  borrow  abroad  continually  to  outrun  the 
constable  without  any  care  for  balancing  its 
budget,  direct  encouragement  is  given  to 
political  and  other  corruption,  and  to  forms  of 
collective  extravagance  which  are  still  worse 
in  their  economic  results.  When  the  time 
comes  when  the  borrowing  process  cannot  be 
repeated,  and  the  Government  is  no  longer 
able  to  fill  the  gap  between  its  revenue  and 


A   DISGUSTING   SPECTACLE   197 

expenditure  by  raising  money  abroad,  then  the 
country  finds  itself  faced  with  the  necessity 
either  for  imposing  taxation  on  a  scale  of  great 
severity,  and  shipping  continually  to  the 
borrowing  country  a  large  proportion  of  its 
natural  produce,  or,  as  Is  more  likely,  for 
making  a  composition  with  its  creditors,  in  the 
course  of  which  it  repays  their  criticisms  of  Its 
levity  and  improvidence  with  plentiful  charges 
of  exploitation  and  capitalistic  blood-sucking. 
In  such  a  case  as  this  both  parties  lose,  and 
the  only  gainers  are  the  horde  of  greedy  or 
questionable  people  who  have  benefited  by  both 
sides  of  the  bargain.  In  the  borrowing  country 
greedy  politicians  have  probably  feathered 
their  nests,  and  perhaps  contractors  have 
made  a  fortune  out  of  constructing  unnecessary 
public  works  at  extravagant  prices.  In  the 
lending  country  touts  and  puffs,  during  a  brief 
but  glorious  harvest,  have  swum  in  champagne. 
The  by-products  of  bad  finance  are  an 
extraordinarily  disgusting  spectacle.  This 
being  so.  the  problem  that  has  to  be  solved 
by  those  responsible  for  our  financial  machinery 
is  this :  How  can  they  keep  It  clean,  and  pre- 
vent it  creating  these  evil  products  ?  The 
answer  is  very  difficult.  In  the  past  the  action 
taken  by  the  leaders  of  finance  in  the  great 
creditor   countries,  which    were    England    and 

o 


198         INVESTMENT  ABROAD 

France,  has  been  purely  negative.     They  re- 
fused   to    handle    any    business    which    they 
believed  to  be  bad.     It  may  have  been  that 
they  sometimes  erred  on  the  side  of  taking  too 
lenient  a  view  in   criticizing  propositions  put 
before  them  from   the   point  of  view  of  the 
economic  good  of  the  borrowing  country.     As 
long  as  the  charge  involved  by  the  new  debt 
was  amply  covered  it  did  not  seem  to  them 
to  be  their  business  to  ask  whether  the  money 
was    going    to    be    spent    on    increasing    the 
country's  productive  power.     For  example,   if 
a  South  American  Government  had  come  in 
old  days  to  a  syndicate  of  French  banks,  and 
a  great  English  issuing  house,  with  a  proposi- 
tion for  a  loan  of  a  couple  of  millions  sterling, 
or  fifty  million  francs,  and  if,  on  the  existing 
basis  of  revenue,  there  was  no  question  that  the 
service  of  this  new  debt  was  sufficiently  well 
secured  to  justify  these  institutions  in  making 
an  issue  to  the  public  that  followed  their  lead, 
they  would  probably    not   have    inquired   too 
closely  concerning  the  use  to  which  the  money 
was  going  to  be  put.     It  would  have  been  very 
difficult  for  them  to  do  so,  because  economically 
backward    States  are  extremely  touchy  about 
their  financial  position   and   their  financial  re- 
sponsibilities.    They  naturally  and  inevitably 
resent  any  financial    tutelage,   and   they  con- 


VIRTUE'S    REWARD  199 

sider,  if  they  can  offer  a  well-secured  loan,  and 
show  that  it  has  been  duly  authorized  under 
the  laws  of  the  country,  that  that  is  all  that 
the  financial  house  to  which  they  entrust  the 
business  has  any  right  to  ask.  So  that  any 
house  or  bank  which  wanted  to  make  stipula- 
tions, which  would  be  in  the  interests  of  the 
country  even  more  than  of  the  future  bond- 
holders, would  run  a  serious  risk  of  losing  the 
business,  and  of  putting  it  into  the  hands  of 
less  particular  and  less  scrupulous  rivals,  so 
doing  nothing  to  prevent  it  being  carried  out, 
and  only  losing  its  profits  for  themselues  and 
for  the  centre  in  which  they  worked. 

Consequently,  in  times  when  capital  was 
plentiful,  competition  between  the  issuing 
houses  of  different  financial  centres  unquestion- 
ably offered  inducements  to  the  backward  coun- 
tries to  borrow  more  than  they  needed,  that  is 
to  say  more  than  was  good  for  them,  with  ulti- 
mately the  worst  possible  results  for  all  parties 
concerned.  The  profits  of  the  issuing  houses 
were  handsome,  and  their  prestige  was  en- 
hanced by  the  volume  of  this  kind  of  business 
that  they  did,  so  long  as  it  was  technically  good, 
that  is  to  say  so  long  as  there  was  no  default. 

It  may  possibly  be  some  years  before  this 
state  of  things  returns,  but  the  economic  re- 
sources of  the  world  have  been  shown  by  the 


200        INVESTMENT  ABROAD 

war  to  be  so  enormous  that  it  will  not  do  to 
rely  with  any  certainty  on  a  famine  in  the 
market  for  capital  which  will  for  some  time  to 
come  make  "those  who  frequent  it  "  forswear 
sack  and  live  cleanly."  Consequently,  it  is  not 
a  day  too  soon  for  those  who  are  concerned  to 
think  this  problem  out,  and  see  their  way 
through  it.  The  real  solution,  as  for  all  these 
problems  which  we  are  considering,  is  the 
terribly  slow  process  of  the  economic  educa- 
tion of  the  public.  If  the  public  could  only  be 
taught  that  loans  to  young  countries  are  not 
good  either  for  the  borrower  or  the  lender 
unless  there  is  a  reasonable  certainty  that  the 
expenditure  of  the  money  by  the  borrower  is 
going  to  be  made  in  such  a  way  that  it  will 
increase  the  country's  industry  or  commerce  to 
an  extent  sufficient  to  cover  the  service  of  the 
debt,  then  there  would  be  no  fear  that  third- 
rate  issuing  houses  would  make  large  profits 
by  bringing  out  ill-secured  loans  in  the  markets 
of  the  world.  Until  that  day  comes  probably 
all  that  can  be  required  of  our  leaders  of  finance 
is  that  they  themselves  should  set  the  very  best 
example,  refusing  to  handle  any  issue  which 
itself  comes  within  the  description  given  above. 
There  will  for  some  time  to  come  be  great 
opportunities  for  the  placing  of  capital  abroad 
under    circumstances    which    fully    justify    it. 


GOOD    FINANCE'S    OBJFXT     201 

There  will  be  railways  to  be  built,  country  to 
be  opened  up,  ports  and  harbours  to  be  con- 
structed and  deepened,  all  kinds  of  enterprise 
waiting  to  be  done,  the  carrying  out  of  which, 
if  carried  out  cheaply  and  well,  should  add 
directly  or  indirectly  to  the  power  of  the 
borrowing  country  to  produce  and  transport 
more  goods  for  the  service  of  man.  As  loans 
are  brought  out  for  these  purposes,  it  should 
be  the  business  of  those  who  handle  them  to 
see  that  these  advantages  are  clearly  set  forth 
so  that  the  public  may  be  taught  to  distinguish 
between  issues  made  for  these  purposes  and 
others  which  are  not  adorned  by  these  qualities. 
The  process  will  necessarily  be  slow,  and  we 
need  not  expect  that  the  desire  to  grow  rich  in 
a  hurry  and  without  trouble  will  cease  to  mis- 
lead those  who  cherish  it  for  many  a  genera- 
tion. But  it  is  only  along  these  lines  that 
international  finance  can  be  kept  clean,  and 
that  capital  sent  from  one  country  to  another 
can  be  relied  on  not  to  fructify  in  corruption. 

So  far  I  have  been  dealing  chiefly  with  the 
problems  that  arise  when  international  finance 
is  concerning  itself  with  loans  made  to  Govern- 
ments. Exactly  the  same  principles,  of  course, 
apply  when  the  borrower  is  a  municipality  or 
any  other  public  body.  When  we  come  to 
companies     formed     to  ,  carry    out    enterprise 


202         INVESTlMENT   ABROAD 

abroad  the  question  is  in  some  ways  simpler, 
in   others   more   complicated.       It   is   simpler 
because  a  company  has  to  rely  upon  its  profit 
for  some  enterprise  which  has  to  be  profitable 
if  that  profit  is  to  be  earned.     There  is  no 
question  here  of  pledging  the  taxable  capacity 
of  a  country,  that  elastic  and  elusive  quantity 
which  no  one  can  test  accurately.     A  company 
is  formed  to  make  a  profit  out  of  some  definite 
operation,  whether  it  be  a  railway,  or  a  land 
scheme,  or  a  mine  ;  hence  it  follows  that  the 
economic  test  of  economic  results  ought  in  all 
cases  to  be  able  to  be  applied  with  success.     If 
any  company  comes  forward  without  being  able 
to  show  at  least  a  fair  chance  of  increasing  the 
material  output  of  the  country  in  which  it  is 
going  to  operate,  it  will  not  get  subscribers. 
On  the  other  hand,  complications  arise  because 
this   kind   of  concern   is   usually   dealt    with, 
except  perhaps   in   the  case   of  railway  com- 
panies, by  less  exalted  institutions  than  those 
which    handle    Government    loans.     Company 
securities,  as  has  already  been  observed,  are 
usually  left  rather  to  the  small  fry  of  finance, 
who  have  less  reputation  to  lose  than  the  lead- 
ing houses,  and    from  the  nature  of  the  case 
and  the  more  speculative  species  of  their  opera- 
tions, they  offer  a  high  rate  of  profit,  and  so 
appeal  to  a  more  speculative  public.     There  is 


FRICTION   AND  DIFFICULTIES    203 

in  their  case  perhaps  a  still  greater  opportunity 
for  friction  and  bitterness  between  the  lender 
and  the  borrower  of  the  capital  than  in  the 
case  of  Government  loans.  If,  for  example, 
the  native  landowners  find  that  they  have  sold 
their  property  to  an  alien  institution  which 
works  it  at  a  profit  highly  satisfactory  to  itself, 
they  are  apt  to  feel  that  they  have  been  hardly 
treated  in  the  matter  of  the  price  paid.  If,  on 
the  other  hand,  this  price  paid  is  such  as  does 
not  give  the  exploiting  company  a  chance  of 
earning  a  profit,  then  those  who  put  their 
money  into  it  are  likely  to  consider  that  some- 
body has  swindled  them,  and  the  foreign  seller 
of  the  property  is  a  convenient  scapegoat. 

Difficulties  also  arise  in  the  matter  of  the 
payment  of  the  native  workers  for  the  com- 
pany. If  the  payment  of  these  workers  is  low 
according  to  European  standards,  humanitarian 
critics  will  be  ready  to  say  that  European  in- 
vestors are  earning  big  profits  by  sweating 
ignorant  labourers  who  have  no  idea  of  the 
value  of  their  labour.  If,  on  the  other  hand, 
the  company  pays  a  higher  wage  than  is  current 
in  the  country  where  it  works,  it  will  earn  for 
itself  the  dislike  and  resentment  of  local 
employers  of  labour. 

Such  are  the  difficulties  which  face  any 
country  that  embarks  in  the;  difficult  business 


204         INVESTMFNT  ABROAD 

of  financing  alien  borrowers,  unless  it  confines 
its  attentions  to  those  whose  claims  for  the 
issue  of  further  capital  are  unquestionable. 
With  the  best  will  in  the  world  the  foreign 
capitalist,  who  has  only  done  his  best  to  stimu- 
late production  abroad  while  earning  a  fair 
rate  of  interest  for  himself,  is  only  too  likely 
to  be  regarded  by.  those  who  have  had  the  use 
of  his  capital  as  an  alien  bloodsucker.  It  is 
a  curious  fact  that  commercial  and  industrial 
transactions  seem  to  lead  to  much  less  ill- 
feeling  than  financial  relations  between  any 
two  parties.  If  we  buy  boots,  or  any  other 
commodities,  or  if  we  buy  the  use  of  certain 
services  that  we  need,  such  as  transport,  we 
get  the  things  we  want,  and  we  pay  what  the 
seller  asks  for  it,  sometimes  with  grumbling 
and  hesitation,  but  at  any  rate  we  feel  that  it  is 
a  mutually  satisfactory  transaction,  or  it  would 
not  have  been  entered  into.  If  we  buy  the 
use  of  somebody  else's  money  by  promising 
to  pay  interest  on  it  and  to  pay  it  back  some 
day,  it  is  almost  certain  that  a  feeling  of  resent- 
ment will  arise  sooner  or  later  before  the 
transaction  is  completed.  This  is  probably 
so  because  we  very  soon  forget  the  advantages 
that  we  secured  when  we  got  the  money, 
whereas  every  interest  day  when  we  have  to 
make   a   periodical   payment,   and  every   time 


THE    CREDITOR'S    LOT         205 

when  we  have  to  pay  back  some  of  the  capital, 
we  are  reminded  very  forcibly  that  we  owe 
something  to  somebody,  and  that  we  have  got 
to  pay  it,  and  that  the  advantage  for  which  we 
are  paying  is  ancient  history  and  practically 
forgotten. 

Twenty  or  twenty-five  years  ago,  when  a 
kirge  number  of  American  farmers  were  still 
indebted  to  English  mortgage  companies,  the 
unpopularity  of  England  in  America  was  seri- 
ously said  to  have  been  increased  by  this  fact, 
although  the  capital  acquired  at  the  time  when 
the  advances  were  made  had  been  a  potent 
factor  in  the  development  of  America's  re- 
sources. So  it  is  everywhere  the  lot  of  a 
creditor  country  to  be  hedged  about  by  many 
disadvantages. 


CHAPTER  IX 

FINANCE    AND   GOVERNMENT 

In  old  times  before  the  war  the  Government 
as  a  factor  in  finance  was,  in  well-developed 
and  well-managed  countries,  comparatively  un- 
important. A  small  proportion  of  the  national 
income,  that  is  of  the  aggregate  income  of  all 
the  citizens  of  the  country,  was  taken  by  the 
Government  for  public  purposes  by  the  process 
of  taxation.  In  England,  for  example,  where 
the  aggregate  income  of  the  citizens  was  esti- 
mated before  the  war  at  somewhere  between 
200O  and  2400  millions,  the  total  expenditure 
of  the  State  amounted  to  less  than  200  millions, 
the  whole  of  which  was  provided  by  taxation 
and  by  profits  on  State  services,  such  as  the 
Post  Office.  In  fact,  a  small  fraction  of  the 
public  revenue  was  devoted  to  the  redemption 
of  the  public  debt,  the  total  so  used  in  the  last 
complete  year  before  the  war  being  about 
9  millions. 

In  the  light  of  what  has  happened  during 


HUGE   CHARGES  TO   BE   MET    207 

the  war  and  what  is  Hkely,  if  not  certain,  to 
happen  after  the  war,  the  calls  of  the  public 
purse  upon  the  joint  purse  of  the  individuals 
composing  the  nation  were  thus  a  very  small 
matter.  Nevertheless,  even  in  those  days, 
there  was  plenty  of  controversy  concerning  the 
best  methods  by  which  revenue  could  be 
raised,  and  the  balancing  of  the  annual  budget 
was  a  matter  that  always  provoked  a  good 
deal  of  discussion,  and  sometimes  a  certain 
amount  of  difficulty. 

In  this  connection  the  duty  of  the  Govern- 
ment is  confined  to  raising  all  that  is  required 
for  public  purposes  by  taxation,  or  by  loans,  if 
loans  are  justified  or  inevitable  ;  finance,  or 
at  least  the  financial  machinery  as  carried  on 
by  individual  enterprise  apart  from  the  Govern- 
ment, has  little  or  nothing  to  say  to  the  matter. 
Since,  however,  it  is  clear  that  in  the  future 
very  much  larger  revenues  will  have  to  be 
raised  in  order  to  meet  the  huge  charges  that 
will  be  imposed  upon  the  nations  of  the  world 
by  war  debts,  to  say  nothing  of  heavier  ex- 
penditure upon  all  kinds  of  schemes  by  which 
the  economic  position  of  the  nations  may  or 
may  not  be  benefited,  it  is  clear  that  all  the 
controversies  that  used  to  rage  concerning 
questions  of  taxation  will  be  greatly  increased 
and  embittered,  and  it  is  much  to  be  desired 


2o8    FINANCE  AND  GOVERNMENT 

that  those  who  handle  the  machinery  of  finance 
should  obtain  clear  views  concerning  what  is 
and  is  not  good  policy  on  this  subject.  Hitherto 
they  have  been  inclined  to  leave  the  matter 
to  the  officials  concerned,  and  have  given 
little  attention  to  the  study  of  the  very  im- 
portant questions  involved.  A  sound  public 
opinion  on  the  subject  of  taxation  and  public 
loans  is  probably  one  of  the  most  profitable 
assets  that  a  nation  can  possess,  and,  since 
financiers  ought  from  their  position  and  ex- 
perience to  be  more  capable  than  most  other 
members  of  the  community  of  arriving  at 
sound  conclusions  on  problems  that  are  based 
on  figures,  it  is  high  time  for  them  to  purge 
their  minds  of  all  prejudice  and  think  these 
questions  out ;  so  that,  when  controversy  arises, 
they  may  have  some  practical  contributions  to 
make  to  the  stock  of  national  wisdom. 

There  is  no  need  now  to  enter  into  an  his- 
torical disquisition  on  the  growth  of  public 
sentiment  concerning  the  right  kind  of  taxa- 
tion. It  is  universally  admitted  that  the  test 
of  all  taxation,  the  one  which  was  embodied 
in  Adam  Smith's  famous  maxim  on  the  subject, 
is  that  it  should  be  applied  in  proportion  to 
the  ability  of  the  taxpayer  to  meet  it.  In  con- 
sidering this  question  there  is  no  need  and  no 
benefit   in  being   sentimental   and   wandering 


BAD    POLICY  209 

into  ethical  doctrine.  What  we  have  to  con- 
sider is,  what  kind  of  taxation  will  pay  a 
nation  best  from  the  point  of  view  of  its 
interest  of  the  whole. 

It  is  at  once  abundantly  clear  that  to  impose 
any  taxation  upon  those  who  are  struggling  on 
the  margin  of  subsistence  is  bad  policy,  quite 
apart  from  any  humanitarian  views,  from  the 
point  of  view  of  the  pockets  of  the  other 
members  of  the  community  and  of  the  nation 
as  a  whole.  Those  who  have  not  enough  to 
keep  themselves  strong  and  efficient  will  only, 
if  money  is  taken  out  of  their  pockets  by  taxa- 
tion, be  reduced  to  a  still  lower  level  of  in- 
competence and  bad  health,  and  so  become 
sooner  or  later  a  charge  either  upon  the  charity 
of  their  fellow  citizens  or  upon  public  institu- 
tions which  have  to  provide  for  the  destitute. 
From  the  most  entirely  utilitarian  and  practical 
point  of  view,  taxation  that  increases  the  misery 
of  the  miserable  is  bad  for  their  more  prosperous 
neighbours.  If  once  this  is  granted,  and  any 
one  who  is  not  blinded  by  habit  and  prejudice 
must  surely  grant  so  obvious  a  platitude,  it  is 
seen  that  all  indirect  taxation  upon  the  neces- 
saries of  life  is  ruled  out  as  being  bad  business 
from  the  point  of  view  of  the  State. 

For  example,  a  tax  on  bread  is  clearly  the 
worst  kind   of  finance    in    any  community    in 


2IO    FINANCE  AND  GOVERNMENT 

which  there  is  any  considerable  number  of 
people  who  are  not  already  properly  provided 
with  food  and  light  and  clothes  and  housing 
accommodation.  Thus  it  happens  that,  in 
communities  that  have  arrived  at  anything 
like  a  reasonable  state  of  economic  develop- 
ment, it  is  not  usual  now  to  find  taxes  upon 
food  imposed.  It  is  done  sometimes,  as  in 
Germany,  for  example,  where  it  was  considered 
that  public  policy  made  it  necessary  that  the 
landed  interest  should  be  maintained  in  a 
sufficient  state  of  prosperity  with  a  view  to  the 
political  stability  of  the  country,  and  that  a 
number  of  people  working  on  the  land  should 
still  be  kept  in  the  position  of  comparative 
backwardness  implied  by  that  occupation,  so 
that  the  supply  of  physically  developed  but 
mentally  docile  recruits  for  the  army  might 
be  maintained  at  the  required  level. 

Apart  from  political  or  military  considera- 
tions of  this  kind,  it  will  not  often  be  found 
that  modern  States  permit  revenue  to  be  raised 
to  any  great  extent  from  the  food  of  the  people. 
Even  when  we  move  on  from  the  actual  neces- 
saries of  life,  such  as  bread,  to  articles  of 
common  consumption,  such  as  tea  or  tobacco, 
it  is  seen  at  once  that  taxation  imposed  upon 
them  has  the  grave  disadvantage  of  implying 
what  economists  call  "  inverse  graduation,"  that 


"INVERSE   GRADUATION"     211 

is  to  say,  it  presses  with  a  growing  weight  of 
severity  upon  those  who  are  least  able  to  bear 
the  weight  of  taxation.  The  taxation  implied  by 
the  purchase  of  an  ounce  of  tobacco  is  the  same 
whether  the  buyer  be  a  crossing-sweeper  or  a 
millionaire.  The  proportion  of  income  spent 
upon  tobacco  by  the  crossing-sweeper  is  very 
much  hisfher  than  in  the  case  of  the  millionaire, 
and  the  total  income  out  of  which  it  is  paid  is 
very  much  lower.  Consequently,  taxes  such  as 
these,  though  they  find  their  place  in  the  fiscal 
policies  of  most  countries,  do  not  commend 
themselves  on  purely  economic  grounds. 

The  idea  that  lies  behind  them  is  that  taxa- 
tion is  most  easily  collected  when  the  man  who 
pays  it  is  not  aware  or  habitually  forgets  that 
he  has  paid  it.  Any  one  who  buys  tobacco  or 
sugar  is  supposed  to  be  deluded  into  the  belief 
that  all  the  money  paid  for  these  commodities 
is  actually  spent  upon  them — he  does  not  re- 
cognize that  part  of  it  is  actually  spent  upon 
the  government  of  the  country,  and  so  he 
contributes  readily  to  the  government  of  the 
country  because  he  does  not  know  that  he  is 
doing  so. 

This  sort  of  principle  in  taxation  may  have 
worked  well  in  times  when  statesmen  were 
somewhat  unscrupulous  in  the  matter  of  im- 
posing a  burden  so  long  as  those  upon  whom 


212    FINANCE  AND  GOVERNMENT 

it  was  placed  were  too  ignorant  to  recognize 
it,  and  too  ill-organized  to  protest  against  it. 
Nevertheless,  the  tendency  has  lately  been  for 
a  decrease  in  the  proportion  raised  by  indirect 
taxation  and  an  increase  in  the  proportion 
raised  by  direct  and  conscious  payments  on  the 
part  of  the  citizen,  who  knows  perfectly  well 
what  he  is  paying  and  pays  with  as  much 
cheerfulness  as  he  can  muster.  The  greater 
honesty  of  this  process  is  a  strong  recom- 
mendation in  its  favour,  and  it  is  fairly  clear 
that,  as  the  economic  education  of  the  leading 
nations  progresses  (if  indeed  it  can  yet  be  said 
to  have  begun),  this  tendency  to  direct  and  con- 
scious taxation  will  continue  at  an  accelerated 
pace  until  it  is  possible  that  in  the  fullness  of 
time  it  will  drive  all  others  out  of  the  field. 
Nevertheless  there  is  still  a  very  strong  pre- 
judice against  direct  taxation,  especially  on  the 
part  of  those  who,  owing  to  its  limited  applica- 
tion, have  to  submit  to  indirect  taxation  with 
all  the  inequities  of  inverse  graduation  already 
described. 

It  has  been  said  by  Sir  Robert  Giffen  that 
direct  taxation  produces  three  times  as  much 
misery  as  indirect.  If  this  is  so,  it  only  shows 
how  much  has  to  be  done  to  bring  home  to  the 
citizen  what  taxation  means  and  the  best  way 
of  collecting  it  and  of  paying  it.     As  long  as 


IF   AND   WHEN  213 

taxation  is  resented  as  a  more  or  less  unfair 
imposition  by  which  a  quite  unsympathetic 
Government  takes  a  certain  amount  of  money 
out  of  our  pockets  and  uses  it  for  purposes  of 
which  we  may  or  may  not  approve,  it  may  be 
true  that  the  best  way  to  get  money  out  of 
people  is  to  take  it  from  them  in  ways  which 
leave  them  unconscious  that  they  are  being 
relieved  of  it.  If  and  when  a  community  can 
be  discovered  in  which  taxation  is  recognized 
as  the  means  by  which  a  Government  chosen 
by  the  voice  of  the  people,  acting  in  accordance 
with  the  will  of  the  people,  takes  money  from 
them  to  be  spent  for  the  good  of  the  people, 
then  it  will  perhaps  be  recognized  that  money 
so  taken  by  the  Government  should  and  will 
be  contributed  cheerfully  by  the  citizen,  and 
that  he  will  not  want  to  be  bamboozled  into 
paying  it  in  the  belief  that  he  is  buying  groceries 
or  tobacco,  but  that  he  will  prefer  to  know 
exactly  what  he  is  paying  and  exactly  how  it 
is  going  to  be  spent. 

This  can  only  be  done  by  the  development 
of  the  raising  of  revenue  by  what  are  called 
direct  taxes  ;  that  is  to  say,  by  income  tax  in 
its  various  forms,  and  by  death  duties  and 
legacy  duties.  The  advantages  of  these  taxes 
lie  not  only  in  their  being  clearly  recognized 
when   paid,  but  that  in   their  case   only  is   it 

p 


214    FINANCE  AND  GOVERNMENT 

possible  to  apply  the  great  principle  of  gradua- 
tion and  differentiation  which  makes  people 
pay  more  or  less  according  to  the  amount  of 
their  income  and  the  source  from  which  it  is 
obtained. 

Taxation  in  proportion  to  ability  to  pay 
clearly  implies  that  those  who  have  larger 
incomes  should  pay  a  higher  proportion  of  it 
in  taxation.  If  we  take  three  incomes  of  ;!^ioo, 
;^iooo,  and  ;^  10,000  a  year,  and  take  10  per 
cent,  from  each,  it  is  obvious  that  the  sacrifice 
implied  is  not  the  same.  The  man  with  ;!^ioo 
a  year  pays  ;^io,  and,  with  prices  at  anything 
like  their  present  level,  his  health  and  efficiency 
and  those  of  his  family  would  certainly  be 
impaired  because  they  would  have  to  reduce 
their  purchases  of  the  necessaries  of  life.  The 
man  with  ^1000  a  year,  who  paid  ;^ioo,  would 
not  suffer  any  encroachment  upon  his  supply 
of  necessaries,  but  would  have  to  curtail  his 
supply  of  comforts  to  a  very  much  greater 
extent  than  his  richer  neighbour  with  ^^  10,000 
a  year,  who,  having  paid  his  ^1000,  would 
still  have  ;^900o  with  which  to  control  for  his 
own  use  the  goods  and  services  produced  by 
the  community. 

There  is  another  still  more  practical  argu- 
ment in  favour  of  graduation,  which  is  that  he 
who  has  more  depends  more  upon  the  protection 


THE  STATE'S  PROTECTION    215 

of  the  State  than  he  who  draws  a  smaller 
income.  The  enjoyment  of  a  large  income 
implies  so  much  in  the  way  of  ordered  civiliza- 
tion and  the  protection  implied  by  that  stable 
organization,  that  we  see  at  once  that  those 
in  enjoyment  of  large  incomes,  if  that  stable 
organization  did  not  provide  them  with  the 
necessary  security,  would  have  to  pay  away  a 
large  proportion  of  it  in  keeping  a  private 
army  to  defend  them  ;  whereas  those  with  small 
incomes,  having  little  or  nothing  that  is  worth 
stealing,  are  not  nearly  so  liable  to  attempts 
by  freebooters  to  rearrange  the  wealth  of  the 
world  in  their  own  interests. 

And  it  is  not  only  in  the  enjoyment  of  his 
income  that  the  man  with  the  large  one  owes 
more  to  the  State  and  its  protection.  He 
could  not  even  earn  it  if  it  were  not  for  the 
orderly  state  of  society  which  enables  him  to 
exercise  his  talents.  It  is  possible  that  in  the 
Middle  Ages  robber  barons  and  cattle  lifters 
and  others,  who  took  advantage  of  the  oppor- 
tunities afforded  by  a  primitive  community, 
may  have  lived  upon  the  rest  of  society  with 
a  certain  amount  of  satisfaction  to  themselves 
and  in  the  enjoyment  of  the  very  moderate 
comforts  that  were  then  available.  But  they 
could  not  have  indulged  themselves  with  any- 
thing like  the  ease  and  comfort  that  are  now 


2i6    FINANCE  AND  GOVERNMENT 

available  to  those  who  enjoy  large  Incomes. 
And  they  could  not  have  imitated  modern  suc- 
cessful business  men  in  anything  like  the 
extent  of  the  wealth  that  they  were  able  to 
earn  by  their  more  questionable  system.  Suc- 
cessful business  men  very  naturally  believe 
that  they  owe  all  that  society  gives  them  to 
the  exercise  of  their  talents.  They  do  not 
often  reflect  that  they  could  neither  have  ac- 
quired nor  exercised  these  talents  on  a  desert 
island,  or  even  in  an  economically  unorganised 
State.  The  enterprise  of  a  modern  captain  of 
industry  depends  so  much  upon  the  existence 
of  an  army  of  producers,  an  army  of  trans- 
porters, and  an  army  of  consumers,  and  so 
much  on  an  ordered  State  which  provides  the 
necessary  police,  so  that  all  these  armies  can 
carry  out  their  operations  undisturbed  by 
anarchy  and  confusion,  that  the  debt  of  suc- 
cessful earners  to  the  State  is  one  which  fully 
justifies  the  principle  of  graduation  in  the 
raising  of  the  State's  revenue — that  is,  the 
principle  that  from  those  who  have  most  shall 
most  be  taken  away. 

When  we  come  to  differentiation,  we  see 
again,  if  we  remove  all  prejudice  from  our 
minds,  that  this  principle  also  is  based  upon  a 
thoroughly  equitable  foundation.  Those  who 
enjoy  an  income  which  they  get  from  inherited 


DIFFERENTIATION  217 

wealth,  or  wealth  which  they  have  received 
by  gift,  do  so  without  any  exertion  on  their 
own  part  and  without  any  of  the  anxiety  which 
must  haunt  the  salary  earner,  who  may  be 
earning  as  much  or  a  still  greater  income,  espe- 
cially if  he  has  dependents.  A  man  who  is  earn- 
ing ^1000  a  year  in  return  for  hard  work  done, 
and  liable  to  be  stopped  at  any  moment  if, 
owing  to  ill-health  or  any  other  accident,  he 
were  deprived  of  his  position,  is  earning  an 
income,  which  is  a  very  different  matter  from 
his  neighbour  who  is  receiving  ^1000  a  year 
from  investments  in  gilt-edged  securities,  the 
whole  of  which  has  been  left  him  by  a  father 
or  an  uncle  or  a  friend. 

Ability  to  pay  in  these  two  cases  is  obvi- 
ously not  the  same.  The  earner  is  not  able 
to  pay  so  much,  because  he  is  bound,  if  he  is 
not  going  to  become  a  charge  on  the  State,  to 
set  aside  every  year  a  certain  amount  as  a 
provision  against  ill-health  or  old  age.  From 
the  other  man  the  limit  of  the  amount  that 
can  be  taken  would  at  first  sight  appear  to  be 
all  that  can  maintain  him  in  sufficient  health 
and  efficiency  to  lead  a  life  of  idleness.  In 
fact,  it  may  be  contended  that,  from  the  point 
of  view  of  the  benefit  to  the  owner  of  the 
income,  the  kindest  thing  to  do  would  be  to 
take  it  all  away  from  him  so   long  as   it  was 


2i8    FINANCE  AND  GOVERNMENT 

done  early  enough  in  his  career  for  him  to 
learn  how  to  make  a  living  for  himself.  The 
existence  of  an  idle  rich  class  is  not  good  for 
the  community,  and  is  not  good  for  the  members 
of  the  class,  if  they  make  bad  use  of  their  oppor- 
tunities. Fortunately,  human  nature  being 
on  the  whole  reasonable  and  well-meaning,  it 
is  by  the  idle  rich  class  that  a  great  deal  of 
quiet  public-spirited  work  is  done  which  might 
otherwise  not  be  done  at  all.  Nevertheless, 
the  strain  on  the  ordinary  person  who  finds 
himself  cursed  with  a  competence,  as  the  phrase 
says,  is  so  great  that  it  requires  unusual  strength 
of  mind  for  anybody  so  cursed  to  go  through 
life  without  becoming  a  nuisance  to  himself  and 
his  neighbours. 

Recognition  of  this  fact  has  become  very 
much  more  general  since  the  war  has  set  most 
people  busy  in  most  countries  of  the  world,  and 
it  seems  probable  that  taxation  of  estates  pass- 
ing by  death,  or  of  incomes  acquired  by  in- 
heritance, is  the  means  by  which  economic 
progress  in  the  direction  of  the  better  distribu- 
tion of  wealth  will  advance  most  rapidly  in 
future.  It  is  quite  a  common  thing  now  to 
hear  rich  people  admitting  that  it  is  not  good 
for  anybody  to  be  born  too  rich.  Hitherto 
estate  duties  and  differentiated  income  tax  have 
been  objected  to,  and  with  some  reason,  on  the 


A  PSYCHOLOGICAL  PROBLEM   219 

ground  that,  if  they  are  screwed  up  too  high, 
they  will  tend  to  limit  the  process  of  accumula- 
tion on  which  economic  progress  depends. 
Why,  it  is  asked,  should  anybody  work  to 
make  a  big  fortune,  if  the  State  is  going  to 
take  a  large  slice  of  it  when  he  dies,  and  then 
impose  a  highly  differentiated  income  tax  on 
the  heirs  whom  he  leaves  to  enjoy  it  ? 

This  question  was  difficult  to  answer  so  long 
as  many  of  the  people  who  were  likely  to  be  ac- 
cumulating fortunes  felt  like  that.  Taxation  pro- 
blems, like  most  economic  problems,  are  largely 
psychological.  If  enough  people  who  were 
likely  to  be  accumulating  wealth  thought  it 
unfair  that  their  accumulation  should  be  taxed 
at  and  after  their  death,  such  a  system  would 
certainly  act  as  a  bar  to  accumulation  ;  and 
accumulation  is,  after  all,  the  process  by  which 
people,  instead  of  spending  their  money  on 
themselves  put  it  at  the  disposal  of  industry 
to  increase  mankind's  production.  It  is  not  a 
good  thing  to  check  accumulation,  but  if  once 
it  is  recognized  that  those  who  accumulate 
fortunes  should  and  can  and  will  do  so  on  the 
same  principle  that  other  people  collect  stamps 
or  blue  china,  and  will  be  sufficiently  satisfied 
by  the  knowledge  that  they  are  going  to  leave 
behind  them  a  million  or  two  at  their  demise — 
if  they  can  be  cured  of  the  idea  that  they  will 


220    FINANCE  AND  GOVERNMENT 

have  no  satisfaction  in  doing  so  unless  those 
who  come  after  them  are  to  be  demoralized  by 
the  use  of  the  millions — then  it  is  quite  possible 
that  the  principle  of  differentiation  and  a  much 
more  vigorous  use  of  estate  duties  may  be 
employed  without  doing  any  economic  harm. 

In  the  meantime,  however,  it  is  desirable 
that  all  who  are  interested  in  good  financial 
arrangements  should  think  out  some  means  by 
which  a  serious  blot  on  the  income  tax  can  be 
removed  ;  that  is  to  say,  its  application  to  the 
whole  amount  that  a  man  earns  or  receives, 
irrespective  of  the  use  that  he  makes  of  the 
money.  Whether  he  spends  all  the  money  on 
himself,  or  whether  he  puts  some  of  it  aside, 
the  income  tax  levied  is  the  same. 

As  has  frequently  been  pointed  out  in  the 
preceding  pages,  the  act  of  saving,  mean  as 
the  motive  to  it  often  is,  is  the  only  method  by 
which  capital  can  be  provided  for  industry,  and 
so  the  economic  progress  of  the  world  can  be 
furthered  and  expanded.  On  economic  grounds 
there  is  every  reason  for  doing  everything  to 
encourage  the  saver,  and  to  penalize  those  who 
spend  money  especially  on  unsocial  objects. 
This  ideal  of  income  tax  levied  on  money 
spent  rather  than  on  the  total  income  received 
has  high  theoretical  authority,  having  been 
fathered   by  John    Stuart    Mill,  approved   by 


TAXING   EXPENDITURE       221 

Professor  Pigou,  and  now  endorsed  by  the 
veteran  Professor  Marshall  in  his  interesting 
contribution  on  National  Finance  and  Taxation 
to  a  book  entitled  After  War  Problems* 
On  p.  321  of  this  work  Professor  Marshall 
remarks  as  follows  : — 

"  If  it  were  possible  to  exempt  from  the  income 
tax  that  part  of  income  which  is  saved,  to  become 
the  source  of  future  capital,  while  leaving  property 
to  be  taxed  on  inheritance  and  in  some  other  ways  ; 
then  an  income  tax  graduated  with  reference  to  its 
amount,  and  the  number  of  people  who  depended  for 
their  support  on  each  income,  would  achieve  the 
apparently  impossible  result  of  being  a  graduated 
tax  on  all  personal  expenditure.  Rich  and  poor 
alike  would  be  left  to  select  those  uses  of  their  in- 
comes which  suited  them  best,  without  interference 
from  the  State,  except  in  so  far  as  any  particular 
form  of  expenditure  might  be  thought  specially 
beneficial,  or  specially  detrimental,  to  public  interests. 
The  income  tax  would  then  levy  the  same  percentage 
on  the  rich  man's  expenditure  on  coarse  tea  and  on 
fme  tea,  on  bread  and  on  expensive  food  ;  and  a 
higher  percentage  on  each  than  on  the  poor  man's 
expenditure  on  anything,  unless  it  be  alcohol  and 
tobacco.  The  way  to  this  ideal  perfection  is  difficult ; 
but  it  is  more  clearly  marked  than  in  regard  to  most 
Utopian  goals." 

Technical  difficulties  bristle  in  the  way  of 
such  a  scheme,   but  technical  difficulties  have 
•  London  :  George  Alien  &  Unwin  Ltd. 


222    FINANCE  AND  GOVERNMENT 

always  bristled  whenever  and  wherever  any 
reform  of  taxation  is  mooted.  The  graduation 
of  income  tax  was  long  declared  to  be  im- 
possible, and  is  now  a  commonplace  of  fiscal 
practice.  In' the  meantime,  pending  the  sur- 
mounting of  these  obstacles,  it  might  be  possible 
to  achieve  something  in  the  same  direction  by 
a  consumption  tax  imposed  by  means  of  a 
graduated  receipt-stamp  on  all  purchases  greater 
in  value  than,  say,  £\.  By  this  method  there 
would  be  no  taxing  of  the  cheapest  kinds  of 
necessities  which  the  poorest  of  the  population 
have  to  buy,  and  v/hen,  for  example,  unpatriotic 
citizens  try  to  evade  taxation  by  making  pur- 
chases of  articles  such  as  diamond  necklaces 
on  the  ground  that  they  yield  no  income  and 
consequently  escape  income  tax,  they  would 
pay  something  to  the  Exchequer  at  the  time 
of  purchase.  It  is  obvious,  however,  that  an 
impost  of  this  kind  would  be  easily  evaded 
unless  the  public  and  tradesmen  with  whom  it 
deals  were  convinced  of  its  equity,  and  also 
that  it  suffers  by  comparison  with  an  equitably 
imposed  income  tax,  because  it  can  only  be 
graduated  according  to  the  amount  of  the  pur- 
chase, and  not  according  to  the  circumstances 
of  the  purchaser. 

In  all  these  problems  of  taxation  a  Govern- 
ment cannot  go  far  ahead  of  the  intelligence  and 


LIMITS   TO   TAXATION         223 

goodwill  of  the  community  it  is  taxing  ;  in  fact, 

more  usually  it  lags  behind  them  and  has  to  be 

pushed  along  by  public  opinion  in  the  direction 

of  fiscal  reform.    There  are  limits  to  the  extent 

to    which    money    can    be    extorted   from   the 

citizens,  even  the  richest  of  them,  against  their 

will.      In    war   time,   when    public   opinion    is 

acutely  critical  of  the  action  of   the  rich,  and 

the    Government    has   means,    by   examining 

people's   foreign    correspondence    and    so  on, 

of  seeing  what  people  are  doing  to  a  much 

greater   extent    than    in    peace,    it    is  able   to 

impose   its  will   in  fiscal   matters   much   more 

easily.     But    in  ordinary   times  the  idea  that 

the  rich  can  be  taxed  to  any  extent  that  idealist 

reformers  think  fit,  without  any  regard  to  the 

feelings   of  the   rich,   is    to    a  great   extent   a 

mistake  ;  even  if  it  were  possible  there  would 

come  a  point  at   which  it  would   not  pay  to 

grow  rich,  and  the  accumulation  of  riches,  badly 

as  they  are  often  used,  is  in  fact  the  process 

by    which    economic    progress    is    at    present 

furthered,  and  can  only  be  furthered  until  some 

better   system    is    found.     Consequently,   it  is 

very  necessary  that  those  who  handle  or  own 

great  wealth  should  give  serious  attention  to 

these    fiscal    problems,    recognizing    the  claim 

of  their  poorer  brethren  that  if  it  were  not  for 

the  great  mass  of  humanity  who  do  the  rough 


224    FINANCE  AND  GOVERNMENT 

work  of  the  world,  the  accumulation  and  enjoy- 
ment of  wealth  by  the  rich  would  be  impossible. 

It  is  probable  that  in  the  next  few  genera- 
tions very  great  changes  will  be  seen  in  fiscal 
methods,  and  unless  these  changes  are  to  be 
hammered  out  in  an  uncomfortable  and  em- 
bittered atmosphere,  it  is  high  time  that  all 
classes  of  the  community  learn  to  take  a  reason- 
able view  of  the  demands  of  government  upon 
private  purses,  and  try  to  turn  these  demands 
into  the  only  direction  that  justifies  government 
in  making  them  :  that  is  to  say,  the  economic 
betterment  of  the  nation  as  a  whole  through 
an  improved  production  and  a  more  equitable 
distribution  of  product. 

Apart  from  taxation,  the  means  by  which 
the  Government  provides  itself  with  money 
for  its  needs  bring  it  directly  into  contact  with 
the  machinery  of  finance,  because  the  only 
methods  by  which  it  can  do  so  are  by  borrow- 
ing or  by  inflating  the  currency.  And  since 
the  process  of  inflation  is  usually  done  through 
the  machinery  of  finance,  and  borrowing  on 
any  scale  has  to  be  so  carried  out,  finance  is 
very  much  in  the  picture  when  the  Govern- 
ment has  resort  to  these  methods  ;  very  often, 
in  fact,  the  two  methods  go  together.  It 
might  be  said  briefly  that  whenever  the  Govern- 
ment borrows   directly   from   bankers,   or   in- 


INFLATIONARY   BORROWING    225 

directly  from  bankers  by  borrowing  from  those 
who  borrow  from  their  banks  in  order  to  find 
the  money,  there  is  an    increase  of    currency 
which  will  not  be  accompanied  by  an  increase 
in     production,     and     will     therefore    involve 
inflation.     For    example,    if,    as    happened    in 
England,    the    Government,    in    times    when 
revenue   is    coming    in    slowly,    raises    money 
by    selling    Treasury    Bills    to    the    Bank   of 
England  or  to  other  banks,  or  by  getting  big 
credits  from  the  Bank  of  England  against  Ways 
and  Means  advances,  the  effect  of  this  is  that 
nobody     hands    over    buying    power    to    the 
Government  which   he  would  otherwise  have 
spent  for  himself,  as  happens  when  taxes  are 
collected;    but   that    the    banking   machinery 
creates   new   money    for    the   Government   by 
giving  it  credits  in  its  books  against  which  it 
can  draw  cheques,  which,  as  it  pays  them  out 
to  contractors  and  others,  are  paid  back  again 
into  the  aggregate  of  banking  deposits,  which 
are  swelled  by  this  process  to  the  extent  of  the 
Government  burrowing. 

By  this  method,  if  we  take  a  concrete  ex- 
ample, the  Government  places  an  issue  of  a 
million  Treasury  Bills  with  an  English  bank  ; 
the  English  bank's  balance  sheet  is  thus  for 
the  time  being  altered  by  its  holding  a  million 
Treasury  Bills  instead  of  a  million  cash  at  the 


226    FINANCE  AND  GOVERNMENT 

Bank  of  England,  which  it  has  handed  over 
to  the  Government  in  payment  of  the  Bills. 
The  Government  pays  the  million  to  half  a 
dozen  firms  of  contractors,  who  proceed  to  pay 
them  into  their  accounts  at  the  bank  which 
lent  the  money,  which  consequently  gets  its 
money  back  with  an  increase  of  a  million  in  its 
deposits.  Its  total  of  cash  is  just  the  same  as 
it  was  before  the  transaction  began,  but  it  has 
added  a  million  Treasury  Bills  to  its  assets, 
and  a  million  deposits  to  its  liabilities.  It 
would  not,  of  course,  often  happen  that  the 
contractors  whom  the  Government  paid  with 
the  million  lent  by  this  particular  bank  would 
all  be  its  own  customers ;  but  if  we  could 
imagine  that  all  banks  in  England  were  one, 
then  it  would  be  obvious  that  one  bank  would 
increase  its  deposits  as  fast  as  it  increased  its 
advances.  And  this  does  in  fact  happen  if 
we  take  the  banking  figures  as  a  whole,  and 
consequently  one  of  the  features  of  British 
war  finance  has  been  a  great  increase  in  bank- 
ing deposits  due  to  the  use  that  the  Govern- 
ment has  made  of  the  banking  machinery  in 
providing  it  with  currency  for  war  purposes 
which  it  had  not  the  courage  to  take  in  taxa- 
tion, or  the  energy  and  ability  to  charm  out  of 
the  pockets  of  the  people  by  successful  appeals 
to  them  to  lend  their  money. 


TREASURY    NOTES  227 

The  British  Government  has  also,  for  the 
first  time  in  its  history,  made  free  use  of  the 
printing-press  on  its  own  account  by  the  issue 
of  a  new  kind  of  currency  called  Treasury 
Notes  for  £1  and  105.  These  notes  were 
first  issued  at  the  time  of  the  crisis  in  August, 
1 9 14,  when  the  public  and  some  of  the  banks 
were  hoarding  gold,  and  the  only  form  of  legal 
tender  paper  was  the  Bank  of  England  note, 
which  was  not  issued  in  denominations  of  less 
than  ;^5.  We  do  not  yet  know  why  the 
Government  undertook  this  business  of  new 
issue  instead  of  leaving  it  in  the  hands  of  the 
Bank  of  England,  which  could  have  handled 
it  with  perfect  ease  and  elasticity,  seeing  that 
the  Currency  Act  of  19 14  suspended  all  re- 
strictions on  its  power  to  issue  notes.  In  their 
original  form  the  Treasury  Notes  were  evi- 
dently meant  only  to  be  issued  as  an  advance 
to  banks.  This  is  shown  by  section  2  of  the 
Act,  which  says  that,  "  The  amount  of  any 
Notes  issued  to  any  person  shall  ...  be  a 
floating  charge  in  priority  to  all  other  charges 
...  on  the  assets  of  that  person." 

It  is  clear  that  notes  which  are  to  be  a 
first  charge  on  all  the  assets  of  the  holder  were 
only  meant  to  be  outstanding  as  long  as  the 
holder  held  them  as  an  advance.  But  the 
Act,     which     was    very    hastily    drafted    and 


228    FINANCE  AND  GOVERNMENT 

passed,  did  not  provide  that  the  borrower  of 
the  notes  could  only  repay  the  advance  in 
the  same  form  in  which  he  had  borrowed, 
namely,  by  handing  back  the  notes.  And  so 
the  banks,  naturally  unwilling  to  pay  the 
Government  interest  at  current  Bank  rate  on 
these  advances  which  took  the  form  of  notes, 
paid  the  Government  off  by  drafts  on  their 
balances  at  the  Bank  of  England,  and  kept 
the  notes  still  outstanding  ;  and  for  a  long  time 
past  it  has  been  the  custom  for  any  English 
bank  that  wanted  notes  to  get  possession  of 
them  by  paying  for  them  with  the  draft  on  its 
balance  at  the  Bank  of  England,  instead  of 
going  through  the  ceremony  of  a  loan.  Con- 
sequently there  has  been  no  limit  to  the  extent 
to  which  these  could  be  created,  except  the 
possession  of  a  sufficient  balance  at  the  Bank 
of  England  on  the  part  of  any  bank  which 
wanted  to  increase  its  supply.  And  as  balances 
at  the  Bank  of  England  have  been  steadily 
fed  by  the  Government's  policy  in  borrowing 
from  the  Bank  on  Ways  and  Means  advances 
and  otherwise,  and  as  these  advances  have 
been  continually  transferred  from  the  Govern- 
ment's credit  to  that  of  the  other  banks  through 
the  process  described  above,  there  has  never 
been  any  lack  of  a  balance  at  the  Bank  of 
England  which  could  be  turned  into  Treasury 


MULTIPLYING   MONEY        229 

Notes,  and  so  the  supply  of  legal  tender  cur- 
rency has  continually  grown. 

These  increases  in  legal  tender  currency, 
and  in  the  right  to  draw  cheques  which  is  in- 
herent in  the  increase  of  banking  deposits, 
have  unquestionably  been  an  important  cause 
of  the  rise  in  prices  which  have  done  so  much 
to  increase  the  cost  of  the  war  in  England,  and 
to  embitter  feeling  between  classes  owing  to 
suspicions  of  exploitation  and  profiteering  on 
the  part  of  those  who  believe  that  prices  were 
being  forced  up  by  unsavoury  machinations, 
when,  in  fact,  they  were  being  hoisted  by  the 
stupidity  and  timidity  of  politicians  and  officials. 

The  scale  on  which  these  things  are  done 
in  war  time  enables  us  to  see  with  special 
clearness  the  evil  effects  that  they  carry  with 
them.  Borrowing  from  bankers  on  Treasury 
Bills,  or  Certificates  of  Indebtedness,  or  what- 
ever the  process  may  be  called,  is  a  system 
which  is  only  justified  as  a  temporary  measure 
to  tide  over  a  period  in  which  the  Govern- 
ment's revenue  is  coming  in  sluggishly.  As 
soon  as  it  is  applied  as  a  permanent  part  of 
Government  fmance  it  means  inflation  on  a 
larger  or  smaller  scale,  and  should  be  resisted 
as  far  as  possible  by  those  responsible  for  the 
financial  machinery  whose  business  it  is,  with 
(heir  experience  and  practical  knowledge,   to 

Q 


230    FINANCE  AND  GOVERNMENT 

correct  the  vagaries  of  official  bunglers  in  the 
money  market.  It  is  commonly  said  that  in 
time  of  war  or  great  emergency  a  certain 
amount  of  inflation  is  inevitable,  because  other- 
wise the  Government  cannot  get  the  money 
that  it  wants.  This  argument  overlooks  the 
fact  that  getting  the  money  is  only  part  of  the 
Government's  problem.  What  it  has  to  do  when 
it  is  at  war,  or  when  any  other  causes  make  it 
necessary  to  take  to  itself  a  large  proportion 
of  the  national  production,  is  to  get  the  goods. 
Manufacturing  more  money,  with  or  without 
the  help  of  the  banks,  if  it  does  not  increase 
the  amount  of  goods  available  merely  gives  the 
Government  a  short  cut  for  grabbing  goods  on 
false  pretences  by  screwing  up  the  prices  of  all 
the  goods  available,  and  so  making  the  com- 
munity go  short  by  reducing  the  buying  power 
of  the  money  that  is  left  in  its  pocket.  It  is 
a  cowardly  and  devious  way  of  doing  the  trick, 
but  as  long  as  the  economic  education  even  of 
the  more  intelligent  classes  of  the  more  in- 
telligent nations  of  the  earth  is  what  it  is, 
there  is  perhaps  a  great  deal  of  excuse  for 
any  Government  that  practises  it  in  time  of 
emergency. 

The  same  process  arises,  of  course,  when 
the  Government,  instead  of  borrowing  from 
banks  or  printing  paper  on  its  own  account, 


MULTIPLYING   SYMBOLS      231 

borrows  from  subscribers  to  its  loans,  who 
do  not  hand  it  over  saved  money,  but  borrow 
from  their  bankers  in  order  to  produce  money 
for  patriotic  purposes.  In  this  case,  unless  the 
borrowing  investor  pays  off  his  advance  from 
his  bank  at  least  as  fast  as  the  Government 
pays  the  money  out,  we  get  an  increase  in 
currency,  and  a  fresh  tendency  to  inflation. 
The  Government's  problem  at  all  times,  what- 
ever be  the  thing  that  it  wants  to  pay  for,  is 
to  make  or  induce  the  citizens  to  hand  it  over 
buying  power  which  otherwise  they  would  have 
spent  on  themselves,  or  have  put  into  the 
development  of  industry.  Any  process  which, 
instead  of  bringing  this  about,  merely  manu- 
factures new  currency,  and  so  depreciates  the 
value  of  all  outstanding  currency,  is  a  fraud 
and  a  delusion  which  brings  its  punishment 
with  it  some  day. 

It  is  very  necessary  to  lay  stress  on  these 
platitudes  because  there  has  hcrj^,  ever  since 
money  was  invented,  a  tendency  to  believe  that 
the  lot  of  mankind  can  be  made  better,  and 
that  wealth  can  be  somehow  created  by  a 
mere  multiplication  of  the  symbols  which  pass 
current  and  are  taken  in  exchange  of  wealth. 
In  times  like  these  when  there  arc  all  kinds  of 
people  eager  to  fmd  panaceas  for  all  kinds  of 
human  ills,  the  crop  of  proposals  for  multiplying 


232    FINANCE  AND  GOVERNMENT 

human  wealth  by  putting  into  circulation  an 
extra  number  of  pieces  of  paper,  is  appall- 
ingly fruitful,  and  if  such  schemes  are  planted 
upon  the  public  by  politicians  who  have  not 
the  courage  to  do  their  financing  in  the  right 
way,  there  is  great  danger  to  the  stability  of 
the  world's  financial  fabric. 

Finally,  to  round  off  the  subject  one  may 
repeat  a  few  more  platitudes,  as,  for  instance, 
that  when  a  Government  borrows  for  any 
purpose  that  is  not  going  to  increase  the 
power  of  the  community  to  produce  and 
transport  goods  it  is  making  a  wrong  use  of 
the  machinery  of  finance,  and  that  when  a 
Government  borrows  abroad,  the  effect  upon 
the  national  welfare  is  clearly  worse  than  if  it 
raised  the  money  at  home.  If  it  borrows 
abroad  and  puts  the  money  to  good  economic 
use  which  increases  the  productive  power  of 
the  country,  then  it  will  have  available  the 
necessary  supply  of  goods  and  services  to  send 
abroad  in  redemption  of  the  debt  and  a  balance 
over.  If  the  borrowing  process  does  not  have 
this  beneficial  effect  the  goods  and  services 
that  have  to  be  sent  abroad  will  be  a  direct 
reduction  of  the  nation's  power  to  consume 
them.  If  the  Government  borrows  at  home, 
and  makes  a  bad  or  unproductive  use  of  the 
money,  the  only  result  is  that  there  is  a  dis- 


DRAFTS   ON    POSTERITY      233 

tortion  of  the  distribution  of  the  national 
wealth.  It  is  not  necessarily  diminished  as  a 
whole — though  it  is  clearly  not  increased  as  it 
would  have  been  if  the  money  had  been  fruit- 
fully invested — but  those  who  have  lent  the 
money  which  has  been  put  to  a  bad  use  are 
thereby  given  a  hold,  until  the  debt  is  repaid, 
over  a  certain  proportion  of  the  national  out- 
put, and  if  this  process  is  carried  too  far  there 
will  be  evil  political  and  social  results.  It  is 
generally  assumed  that  by  borrowing  a  Govern- 
ment can  make  posterity  pay  for  whatever,  by 
war  or  other  enterprise,  has  to  be  financed. 
This  is  to  a  great  extent  a  delusion.  Whatever 
posterity  pays,  it  pays  to  itself.  We  cannot  by 
any  ingenuity  here  and  now  get  money,  still 
less  goods  and  services,  out  of  the  next  genera- 
tion. By  our  loans  and  other  financial  arrange- 
ments we  can  gravely  affect  the  distribution 
of  the  wealth  that  posterity  produces,  but  we 
cannot  get  hold  of  it  ourselves,  and  we  cannot 
diminish  it  except  in  so  far  as  we  leave  a  legacy 
of  social  and  political  trouble  which  may  dis- 
turb the  productive  effort  of  the  nation  in  the 
future. 

Summing  up  the  effort  made  in  this  book, 
I  have  tried  to  show  how  important  it  is  that 
the  machinery  of  finance  should  be  kept  clean, 
and   handled    by  men  with    clean    hands    and 


234    FINANCE  AND  GOVERNMENT 

minds,  filled  always  with  the  wish  to  use  it  for 
the  improvement  of  man's  lot,  and  the  expan- 
sion of  his  power  over  the  forces  of  Nature. 
Many  difficulties  havelbeen  shown  to  lie  in  the 
way  of  the  fulfilment  of  this  ideal,  most  of  which 
are  seen  to  arise  out  of  the  ignorance  and 
greed  of  an  economically  uneducated  public, 
which  continually  invites  sharks  to  prey  on  it, 
and  then  blames  finance,  and  those  who  try 
to  work  it  honestly,  because  its  invitation  is 
accepted. 


INDEX 


America,  banking  in,  40 

„         exports  of,  163,  164,  167-170 
Balance  sheets  of  banks,  65,  66 

„  „      of  Companies,  1 10-132 

Bank  Act,  33 
Bank  note,  30  et  seq. 

Bank  of  England,  monopoly  of  note  issue,  32,  33,  36 
Banks,  balance  sheet  of,  65 
„      deposits  of,  44-46,  63,  72 
„      investments  by,  effect  of,  72 
,,      manufacturers  of  currency,  47,  54 
Bills  of  Exchange  explained,  29,  66-71,  157 

„  „         as  international  currency,  157-159 

Booth,  Sir  Alfred,  quoted,  90,  91 
Canada,  trade  balance  of,  167 
Capital,  credit  and,  80,  81 

„       defmition  of,  81,  82,  92 
Cheques,  advantages  of,  35,  37,38 

„        legal  meaning  of,  29,  36,  37 

„        manufactured  by  bankers,  41 

„        not  legal  tender,  37 

„         origin  of,  24,  25 
Company,  balance  sheets  explamcd,  112-132 

„         capital,  107-132 

„         directors,  126,  127 

„         joint  stock,  why  formed,  133,  134 

Credit,  63-79 

„      definition  of,  64 

„      distinction  between  capital  and,  80,  81 
Currency  {see  also  International) 

„        and  credit,  63 

„        history  of,  25,  26 

„        how  manufactured,  32,  40 

„        meaning  of,  23 

„        provision  of,  23-62 

„        result  of  over-production,  54 
Exports,  visible  and  invisible,  161 
Extravagance,  result  of,  82,  83,  91,  93 
Finance  and  government,  206-234 

„         public  control  of,  12 

„        responsibility  of,  16, 83,  84 
Founders'  shares,  144 


236  INDEX 

Gold,  early  history  and  utilityof,  26-28  _ 

„     effect  on  prices  of,  60 
„     influence  of,  61 
"  Gold  exchange  standard,"  176 
Goodwill,  explained,  120-122 
Government  and  Finance,  206-234 
„  discredit  of,  15 

„  intervention  of,  102-106,  138,  139,  178 

„  result  of  borrowing  by,  229,  230,  232 

„  Stock  Exchange  and,  148 

Hammond,  J.  L.,  quoted,  97,  98 
International  Currency,  155-179 

„  „  Bills  of  Exchange  as,  29,  157-159 

„  „  and  trade  balance,  163, 164,  167-170 

International  Finance,  a  strong  power  for  good,  192-194 
Investment  abroad,  180  et  seq. 
Investors  defined,  85,  140 
LiPTON's  balance  sheet  discussed,  11 2-1 15 
Malthusian  Doctrine,  101 
Marshall,  Prof.,  on  afterwar  problems,  221 
Mill,  John  Stuart,  on  Capital,  82 
Money,  early  history  of,  26,  27 
,,      forms  of,  in  use,  38 
„      meaning  of,  23 
„      "Quantity  Theory"  of,  47-54 
Peel's  Act  of  1844..  32,  35 

Powell,  Ellis,  "  The  Evolution  of  the  Money  Market,"  28,  36 
Preference  stock  holders,  142 
Prospectus,  \-}^^etseq. 
"  Quantity  Theory  "  of  money,  47-54 
Securities,  133  et  seq. 
Speculation,  152 
Taxation,  209  et  seq. 

„  consumption  tax,  222 

„  Death  and  Legacy  Duties,  213,  214 

„  differentiation,  218-220 

„  Direct  and  Indirect,  212 

„  graduation,  210,  211,  214,  215,  221,  222 

Todd,  Professor,  "  Mechanism  of  Exchange,"  48,  49 
"Town  Labourer,"  quoted,  97,  98 
Trade  Balance,  163  et  seq. 
Treasury  Notes,  34,  227 


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